Private capital investments in Africa have fallen significantly amid limited opportunities in fields beyond infrastructure, owing to difficult macroeconomic conditions and forex problems on the continent.
A new report says these investments fell by 23 per cent to $5 billion in 2023, a drop from $6.5 billion a year earlier. It means private capital investments in Africa were the lowest since Covid-19, a feature seen across most major asset classes, except for infrastructure.
The European Investment Bank (EIB), in its latest annual finance in Africa report, says that among the asset classes, private equity and venture capital, typically the two core asset classes in private capital, experienced annual declines of 39 per cent and 59 per cent to $1.24 billion and $1.14 billion respectively relative to 2022.
Private credit, which had surged in 2022, fell by 70 per cent to $330 million, says the report, dubbed Unlocking investments in an era of digital transformation and climate transition (2024).
However, there was a sharp increase in infrastructure spending – almost quadrupling to $2.18 billion in 2023 from $550 million in 2022 that allowed Africa to record a more modest decrease in overall capital investment compared to other regions.
Renewable energy became the industry receiving the largest share of private capital investment in 2023, replacing the financial industry which had led investment in 2022.
The renewables sector accounted for 37 per cent of investment in 2023, with financial services receiving 10 per cent of total investment.
This large increase for the renewable energy sector effectively reversed the share of investment of these two industries in 2022, when the financial sector attracted 37 per cent of total investment.
“This volatility in industry share is partly related to the markets being relatively small. However, industry shares have been steadier in other sectors, including consumer goods and services, industrials, and information technology, with each typically receiving 10-13 percent of the total private investment annually,” the report says.
The agribusiness sector saw its share of investment increase to eight percent in 2023 from one percent in 2022 as agriculture is considered a critical sector for Africa.
One of the largest sectoral declines in private investment observed in 2023 was for conventional energy, which attracted only four percent of total funding, further highlighting the relative appeal of renewables seen recently.
Private capital investment has become more concentrated at the country level, with South Africa accounting for half of all African investment in 2023.
In 2022, South Africa accounted for 20 per cent of private investment on the continent, up from 17 per cent in 2021. The marked increase in concentration in the latest data might be driven by greater investment in larger, more liquid markets when financial conditions are tight.
Kenya is the next biggest individual country market (11 per cent), followed by Côte d’Ivoire (seven per cent) and Morocco (six per cent).
However, except for Morocco, most other large economies saw their share of capital investment decline in 2023 compared with their average for the previous two years.
Nigeria, which was the largest individual market with a 20 per cent share in 2021, has seen a sharp decrease in its share to six per cent in 2023 as venture capital financing of the financial technology (fintech) sector slowed.
According to the report exit values for private capital investments decreased by 39 percent to $4.6 billion in 2023, from $7.5 billion in 2022, but the value of exits remained robust by historical standards. Exit value is the return on an investment or asset at the time of sale.
The report notes that although financial conditions were tight in 2023, private capital funds achieved a high value for exited assets relative to the historical average.
However, there was a more pronounced decline in the number of exit deals, falling to 42 from 80, meaning that the average value of individual exited investments increased to $110 million in 2023 from $94 million in 2022.
The report notes that although economic challenges – particularly inflation – persist, 2024 would hopefully be a turning point for the economic and financial pressures in Africa.
“Some problems undoubtedly still need resolving, with several African countries not reflecting the downward trend in inflation seen across the world (the 2024 rate might actually be marginally higher than the 17 percent observed in 2023),” the report says
“This situation could delay or slow a loosening in monetary policy on the continent, which would affect private sector financing. Nonetheless, economic growth is expected to increase in Africa in 2024 and 2025, with growth in the five-year period between 2024 and 2028 potentially being the fastest on record since 2008-2012, as the drag on economic activity caused by recent global shocks begins to fade.”
According to the report increased financing is needed on the African continent to reach development goals and climate targets, which will require enhanced domestic financial markets and more international financial flows.
Africa needs additional financing of about $194 billion a year to achieve the UN Sustainable Development Goals (SDGs) by 2030, equivalent to seven percent of African gross domestic product (GDP).
However, this is against a background of declining global capital flows and weak development of domestic credit markets.
Development banks play a vital role in growing domestic financial markets, providing international capital flows and catalysing greater private sector development.