In the business world, raising capital is usually the most difficult experience that entrepreneurs have to face in the growth process of their companies. In a country like the United States, access to capital has become far more fluid thanks to equity financing. This has helped many companies grow fast and create abundant wealth for society as a whole as we could see with companies such as Amazon or Microsoft. Traditionally though, raising capital has always been done by debt financing. Debt financing is the process of raising money for working capital through debt. entrepreneurs would usually borrow some money from the bank, and use that money to grow their business. But they have to pay back that debt on a schedule, and failure to do so can result in devastating consequences for the entrepreneur.
Indeed, debt financing has been the main method of fundraising for entrepreneurs in Africa. This is why many businesses failed. Banks are usually reluctant to lend money to entrepreneurs because there is no guarantee that the entrepreneur’s business model would generate enough revenue to pay back the loan. As a result, we’ve seen many young African entrepreneurs full of brilliant ideas, who unfortunately could not grow their businesses due to a lack of capital. However, business fundraising in Africa started to change over the last decade. And this change has become possible thanks to the growth of private equity funds.
Source: African Development Bank
A private equity fund is a pooled investment vehicle where the adviser pools together the money invested in the fund by all the investors and uses that money to make investments on behalf of the fund. Africa is attracting private equity investors for three reasons: (1) the recent robust economic growth on the continent, (2) improvements in structural factors, and (3) the absence of competition in the African market. Between 2002 and 2011, private equity investments grew significantly in Sub-Saharan Africa and South Africa. In 2002, private equity investment in African markets was less than $500 million. By 2006, private equity investment in African markets exceeded $3 billion. Between 2012 and 2017, 953 private equity (PE) deals worth $24 billion were reported. The main sector focuses for PE investments in 2017 were consumer discretionary and IT; others included financial services, education, healthcare, and agribusiness. Nigeria accounted for 73% of the $10.7 billion value of private equity funding in the West African region. This is not surprising, considering a number of PE deals concluded in the country between 2012 and 2017—such as the $350 million private equity investment in Japaul Oil.
Private equity funds provided massive capital to African startups in exchange for equity in these startups. These enable African entrepreneurs to focus on growing their companies and their products rather than being stressed by the reimbursement of bank loans. By providing funding for African companies, PE investments generate a multiplier effect. Indeed, not only does the industry yield profits for its investors, but it also creates socioeconomic benefits for consumers. Businesses backed by PE investments have been shown to grow faster than other types of companies. PE injects international capital into Africa and strengthens economies. In this way, there is an indirect effect on the stability, strength, and vibrancy of both local and regional economies.