The past year has been a seminal one for private equity, especially in Africa. With economies across the continent still struggling after the ructions of the Covid-19 pandemic and vaccine rollouts lagging behind those of developed nations, expectations were muted. But by the end of the first half of 2021, more than $1.3bn in private equity investments had been made continentwide and total investments for the year were set to exceed those of 2020.
While the past two years have shown just how difficult it is to be certain of anything, that is a promising sign going into 2022. But numbers alone don’t tell us everything we should be on the lookout for over the course of the next year. We should also consider the overall investor milieu, which is increasingly influenced by concerns over the natural environment, as well as growth areas and industries.
The following trends will have an effect on private equity in 2022:
- Ongoing focus on environmental, social & governance (ESG) issues and the UN’s sustainable development goals (SDGs). “Business as usual” is no longer an option. Many historic business practices have proven to be damaging to people and the planet. In a bid to change that, many investors have started demanding that their portfolio companies meet ESG standards or that they operate in line with the UN’s SDGs. That is unlikely to change soon. In fact, global ESG assets are on track to exceed $50-trillion by 2025. While some have questioned how viable ESG really is, the problem isn’t with the concept itself but with the lack of standards and regulation until now. That much became evident in October 2021, when fund managers started dropping ESG as a term in line with European greenwashing rules. Ultimately, current ESG standards will probably become regulatory norms, and companies that want to stand out will have to operate in line with the more ambitious SDGs.
- The African opportunity. The Covid-19 pandemic had a particularly damaging effect on Africa. Many economies that were among the world’s fastest-growing were brought to a halt in 2020. Getting them going in 2021 proved challenging. However, that does not mean there aren’t opportunities for investors — far from it. In fact, there will be more opportunities in Africa, especially among companies that have faced the storms of Covid-19. They will need investment to rebuild and be profitable. In particular, Africa will present opportunities for infrastructure and technology growth. Regarding the former, investors will have to find projects and companies capable of going beyond the feasibility and planning stage. Concerning technology, the most important thing will be identifying the companies that best take advantage of the growing levels of connectivity on the continent.
- Sustainability. Africa is ripe with opportunities for sustainable investment. Regarding electricity, the 20 countries globally with the lowest levels of electricity access are all located in Sub-Saharan Africa. With most forms of renewable energy now cheaper than fossil fuels and African countries particularly vulnerable to climate change, there is incredible potential for sustainable investment in this sector. The same holds true for most industries and areas of the economy. And in some areas it is possible to sustainably build new economic verticals without the legacy factors found in more mature markets.
- E-commerce. Covid-19 has accelerated the adoption of e-commerce globally and Africa is no exception. In 2018, e-commerce accounted for 1.4% of SA retail. This doubled in 2020 and was expected to hit 4% in 2021. We have witnessed this exponential growth first-hand in the shape of portfolio company MyRunway, which has gone from a niche fashion outlet to taking on some of SA’s biggest retailers. While the potential e-commerce opportunity is big, successful scaling requires much operating capital. E-commerce organisations across the continent will thus be on the lookout for investment. More particularly, they will be looking for long-term investors who want to act as partners on their journey to scalability. That makes it an ideal avenue for private equity investors.
- Resilience as an investment priority. The businesses that have survived the last two years are incredibly robust. That is especially true for those that have done so in the economies hardest hit by the pandemic. There is therefore more opportunity than before to find a good company in a country you wouldn’t typically think of as a top investment destination. We’ve seen this first-hand, having undertaken several successful investments in Zimbabwe despite the prevailing global investment sentiment being overwhelmingly negative towards investing in this economy. However, it would be remiss for any investor to go into these markets blind. They should instead partner with experienced investors that have a strong track record in these kinds of markets.
The uncertainty of the past two years is unlikely to disappear in 2022. It might not even be dramatically reduced. But amid that uncertainty there is opportunity. With the right understanding of a market, it is possible to find companies that make things better for the communities they operate in and for the planet — and that provide real returns for investors.
• Turner is a partner at Spear Capital.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.