East Africa’s private equity (PE) investments in tech start-up businesses declined by 54 percent last year as the adverse impact of the Covid-19 pandemic pushed venture capitalists to close funds at smaller values than initially planned.
Latest Africa Tech Venture Capital Report (2020) shows that the region attracted $334.3 million worth of private equity capital last year compared to a high of $729 million in 2019, with Kenya leading its peers in the region with investment funds estimated at $305 million.
It is followed by Rwanda and Uganda, which received $11.6 million and $11.3 million of the start-up capital, respectively.
Tanzania and Ethiopia attracted $4.6 million and $1.8 million of the capital for small businesses respectably during the period under review.
Female-founded gigs
A venture capitalist is a private equity investor that provides capital to companies exhibiting high growth potential in exchange for an equity stake.
This could be funding startup ventures or supporting small companies that wish to expand but do not have access to equities markets.
According to the report, Kenya is at the epicentre of the agritech sector’s transformation with $141 million, representing 79 per cent of the total agritech equity funding in Africa.
This growth was enhanced by a single largest deal valued at $85 million which the country (Kenya) concluded last year.
Kenya’s female-founded start-ups raised $204 million in equity funding, accounting for a 22 per cent decline compared with 2019.
In Africa, equity funding raised by African tech start-ups declined by 29 per cent to $1.42 billion in 2020 from $2.02 billion in 2019.
“Despite a strong growth in activity, the total amount raised by African start-ups decreased for the first time after nearly a decade of accelerating growth. While it is still higher than 2018 and before, this sharp drop clearly marks the impact of the pandemic and subsequent lockdowns,” the report says.
According to the report activity has drastically reduced for mega deals valued at more than $50 million while equity fund raising has almost doubled on deals between $200,000 and $1 million.
On a monthly basis African start-ups raised less funding averaging $119.5 million in 2020 compared with $168.29 million in 2019.
Nigeria remains the top most destination for venture capitalists in the continent with $307 million raised in 2020 followed by Kenya ($305 million), Egypt ($269 million), South Africa ($259 million) and Ghana ($111 million).
Fintech concentration
African venture capital investment remains centred around four countries (Nigeria, Kenya, Egypt and South Africa) attracting 80 percent of the volume invested.
According to the report, most of the private equity investments in the continent find their way into key sectors such as financial technology (fintech), agritech, logistics and mobility, off grid/energy, and healthtech.
Fintech investment is quite concentrated with Nigeria (38 per cent), Egypt (28 per cent) and Ghana (13 per cent while agritech is even more concentrated with 79 per cent of the equity funding flowing into Kenya.
Nigeria and Kenya are dominated by one particular industry representing almost half of the funding volumes. These are fintech (44 per cent) and agritech (46 per cent) for Nigeria and Kenya, respectively
Shifting appetites
The International Finance Corporation (IFC) notes that Private Equity Funds’ returns will take a hit in the short term (within a year) as a result of significant write-downs in portfolio companies’ valuations, exchange rate volatility, and challenges in exiting investments.
According to the IFC the negative impacts of Covid-19 are expected to be higher on venture capital funds in the short term but venture capital funds are likely to benefit from increased appetite for technology-based companies in the medium term.
It is argued that the sub-Saharan Africa market entered the Covid-19 crisis more vulnerable than most other emerging markets, with more limited availability of private capital, which have seen fund managers close funds at smaller sizes than initially foreseen.
“Delayed fundraising cycles and a reduction in PE activity overall are expected over the coming years, shrinking the activity of the PE sector,” according to the IFC.
