Unlocking Capital: Tackling Private Equity Challenges in Africa & Emerging Markets

The private equity (PE) and credit industry in emerging markets, particularly Africa, has historically lagged behind developed markets. This disparity is evident in the volume of transactions, investment returns, and exit strategies available within these two market types. According to the Global Private Markets Review by McKinsey for 2024, as of June 30, 2023, the total private market assets under management (AUM) amounted to $13.1 trillion, distributed geographically as follows:

Emerging markets account for just $2.1 trillion (16.03%) of the global private capital, despite contributing to 50.1% of global GDP in 2023. Even though this is a significant increase from the 1960s when emerging markets accounted for only 27% of global GDP, the flow of capital into emerging markets still lags significantly behind developed markets. However, to achieve the United Nations Sustainable Development Goals (SDGs) by 2030, it is imperative to ensure that more private capital flows into emerging markets to help eradicate global poverty and spur economic growth.

However, private capital flows where it can be optimized for maximum returns. Hence, it is crucial for emerging market professionals and policymakers to identify and address the key challenges constraining the efficient flow of private capital into these regions to unlock their potential for business and economic growth. This article aims to highlight the key challenges that make it difficult for emerging markets, particularly Africa, to attract the necessary private capital to revamp the private equity industry and support economic growth.

Key Challenges to Private Equity and Credit Growth in Africa

1. Persistent Currency Depreciation: Currency instability significantly impacts private equity returns in Africa. A depreciating currency erodes the value and returns for General Partners (GPs), making it challenging to pass on the created value to Limited Partners (LPs) and sustain consistent performance. The Africa Venture Capital Association (AVCA) 2021 Annual Private Equity Industry Survey found that 56% of LPs view currency risk as a key challenge when investing in African PE. Meanwhile, 44% of GPs identified short-term macroeconomic risks, such as currency and political instability, as significant.

2. Limited Cross-Border and Intra-Africa Trade: The lack of deep cross-border or intra-Africa trade limits the ability of local businesses to expand their operations into neighboring countries, thus attracting sizable investment capital. For instance, KKR & Co. disbanded its African deal team in 2017, citing a lack of big companies on the continent to buy. Similarly, Bain Capital and Blackstone withdrew from the continent due to difficulties in finding sizable deals. While Africa might not have sizable deals, it certainly has sizable opportunities if cross-border challenges are resolved.

3. Limited Funding from Local Pension Fund Managers, Insurance Companies, and Financial Institutions: Development finance institutions have been the primary anchors for Africa's private equity and credit market. However, the continent’s significant pension fund portfolio, which stands at almost $300 billion, is disproportionately skewed towards investments in government fixed-income instruments. Less than 1% of these funds are allocated to the private equity/credit market, significantly constraining the liquidity of the industry and the ability of GPs to exit positions smoothly.

4. Underdeveloped Capital Markets and Financing Solutions from Commercial Banks: Africa's capital markets are less developed, posing significant challenges for private equity firms to exit their investments through initial public offerings (IPOs) or secondary sales. Additionally, commercial banks are often reluctant to develop products to support exits and buyouts of portfolio companies, further limiting exit opportunities for GPs and constraining overall investment into the space.

Conclusion

Private equity and credit are essential for economic development in any developing country. Addressing the challenges facing this industry in Africa will substantially impact overall economic growth and job creation on the continent. It is imperative that industry players and policymakers collaborate to identify and resolve these issues to unlock the potential of private equity and credit markets in Africa. By addressing these critical challenges, Africa can attract the necessary private capital to foster economic growth, create jobs, and achieve sustainable development