Sustainability in African Private Equity: Myth or Reality?

by Aïssata Coulibaly, Senior Manager, Private Equity, EY Luxembourg

The Private Equity (PE) industry is still experiencing a period of rapid evolution marked by an expansion of PE across the emerging markets. In this context, Africa’s strong long-term growth fundamentals remain the key drivers of the PE and Venture Capital (VC) industry on the continent.

EY Luxembourg, with a strong positioning on Africa, organized a PE / VC event dedicated to the continent on 29 November 2018 in co-operation with Lux Africa. During this event, the European Investment Bank (EIB) presented Boost Africa, a joint initiative with the African Development Bank, (AfDB) aimed at harnessing the continent’s potential and creating opportunities on the ground level through the deployment of a blended financial approach.

During this event, some of the most successful PE and VC practitioners in Africa shared with the audience their practical experiences on how to successfully invest in Africa, navigate operational obstacles and benefit from one of the most exciting opportunities in the global economy.

Private Equity in Africa: A Growth Narrative

Africa continues to suffer from a decades-long perception that the region is an area of economic stagnation and political instability. Fortunately, a new African narrative has emerged. Increased investment from both local and foreign investors across a wide range of industries is now driving the modern Africa’s story, giving way to a rapidly growing middle class and rising consumer power.

PE is an increasingly important part of this narrative. The PE community in Africa is gradually outgrowing its infancy, with a variety of global and local players exploring opportunities far beyond the already established market of South Africa.

PE houses in Africa bring far more to the table than just the Capital required for growth. Perhaps most importantly of all, they foster a culture of strong, ethical governance.

The state of Environmental, Social and Governance (ESG) concerns in Africa

ESG concerns offer PE portfolio managers added insight into the quality of a portfolio company’s management, culture and risk profile. ESG factors are gaining prominence in the international investment community, while financial services organizations are facing pressure on several fronts, including the tightening of regulatory expectations and increasing customer awareness of, and demand for, sustainable finance solutions.

However, ESG concerns have been at the core of the investment process in Africa for some time.

According to the African Private Equity and Venture Capital Association (AVCA) 2017 Africa Sustainability Study, 80% of respondents (companies investing in Africa) indicated that they had made their investments based on ESG considerations.

Furthermore, 95% of the surveyed PE backed companies in Africa had ESG implementation reported using specific frameworks such as the performance standards of the IFC (a member of the World Bank Group) or of the CDC (the UK’s Development Finance Institution).

This adoption of ESG into the African PE / VC industry has its roots in the strong involvement of Development Finance Institutions (DFIs) such as CDC, the EIB or the AfDB into Africa PE and VC ecosystems. These government-funded institutions are leading the promotion of strong inclusion of ESG concerns in their investment decisions.

The Boost Africa initiative illustrates this point. The joint initiative aims to invest in funds that generate first-class opportunities in terms of quality, impact and innovation. Since July 2017, Boost Africa has committed USD 38 million into 2 funds that have invested USD 13.2 million in 8 startups, sustaining more than 1 650 jobs.

Furthermore, as per the AVCA’s Guide to Private Equity in Africa, DFIs which have been a strong catalyst of commercial PE on the continent, have disseminated the practice into the industry and continue to maintain strong ESG standards throughout the African PE and VC landscapes.

A bright outlook

The outlook for the continued development and evolution of the PE / VC industry in Africa is bright. Indeed, interest in the African market has never been greater. The value that PE brings to Africa —through financial discipline, access to capital markets, and inclusion of strong ESG standards into the mainstream of investments decision — has never been more apparent.

The integration of ESG concerns into the PE/VC industry in Africa is certainly not a myth. While Africa is a unique and diversified market with its own opportunities and challenges, the impact of PE and VC in the region is only beginning to reverberate. With ESG at the forefront of the investment agenda, the coming decade promises important growth for PE and VC in Africa.