Focusing on solutions and building the African investment ecosystem

With the global venture capital (VC) market having cycled through peaks, steep drops, and consolidation over the past few years, Africa remains a largely untapped opportunity overall, but with some tweaks or a success story or two then VC money could start to flood into its ecosystem, say experts Leo Batalov and David Lekerai. 

“In Africa at this point it’s mostly development financial institutions (DFIs) that put in money to venture capital funds,” notes Leo, the Co-Head of Emerging Growth Companies & Venture Capital in the Dubai office of DLA Piper. Whereas in the United States and Europe, for example, key limited partners (LPs) often include a greater range of pension funds, university and other endowments, and sovereign wealth funds, alongside family offices, high net worth individuals, and corporate investors. “So for Africa there are billions and billions of dollars sitting on the sidelines.”

David, a corporate partner at DLA Piper Africa, Kenya (IKM Advocates) whose clients include DFIs, banks, and investment funds, agrees that shifting some of the “significant amount of local capital” into the African venture capital and private equity space could be game-changing. “In Kenya, our pension fund sector currently holds about $20 billion USD in assets under management, but most of it is in traditional investment asset classes like government securities, the capital markets, real estate, and the like. Less than 1% of it is in the private equity or venture capital space.”

That is despite a law change in 2016 allowing pension funds in Kenya to allocate up to 10% of assets under management to eligible VC and PE funds, with a goal of diversifying portfolios, moving beyond traditional government securities, listed securities, and immovable property, and providing ‘patient capital’ to the private sector.

“As a firm we are involved in trying to push that particular agenda for pension funds to open up and invest in private equity,” says David, “and we’ve seen some of them take advantage of the opportunity but there’s still quite a bit of anxiety or lack of appreciation by the African pension funds for investment in venture capital or private equity, for two main reasons. The first is a misunderstanding of the PE and VCs model and in particular the J-Curve, where there can be negative returns at first, and the second is we unfortunately had a couple of PE and VCs that raised local capital where it didn’t go very well.”

As with elsewhere across the world for VC and PE investment, there are issues and challenges. For Africa in particular, say Leo and David, this can include market fragmentation across a large, dynamic continent; misunderstandings or misperceptions about local risk from foreign investors; and a lack of good ‘exits’. 

“For the VC market, the biggest challenge is exits,” says Leo. “The way the model works, VCs put the money in, and the fund has a lifespan. They need to get the money back and pay their LPs, who are happy putting more money in, and money gets recycled. So the startups that grow, through a series of investments, somebody then needs to buy them or they need to go through an IPO so there’s an exit.”

The lack of exits has been a particular and sometimes hard-to-explain challenge in the African market for venture capital, say Leo and David. While the structural mechanisms can be in place to facilitate VC funds to exit their investment, for example by way of M&A, IPO, or management buyout, they haven’t been regularly actualised. Sometimes because the growing, successful businesses are not ready. 

If investors cannot see a clear road map for an exit strategy, that is a problem. 

The fragmented markets across a huge continent with a big population - not to mention a young, dynamic, and innovative population - also has an impact. “If we could take advantage of this to create a big market that will make some of these innovations and opportunities scalable, in terms of putting in place good purchasing power, then that could make it attractive for international investors,” says David. 

Both Leo and David believe there is huge potential in Africa, but the story of the local investment ecosystems needs to be better told, and boosted by success stories. 

Leo will moderate the opening panel, “From Hype to Fundamentals: Resetting the African VC Story”, at this week’s 22nd Annual AVCA Conference and VC Summit in Nairobi. He and a panel including Fatoumata Bâ of Janngo Capital, Tidjane Dème of Partech Partners, Mohamed Eissa of International Finance Corporation (IFC), and Sapna Shah of Novastar Ventures will discuss what a more resilient, fit-for-purpose African VC ecosystem could look like over the next decade. 

David will later in the week moderate a panel on “Tuk-Tuks and Tomorrow:

Africa’s Mobility Opportunity” The panel includes leading players in the mobility sector including Charles Tryon of Maris Limited, Jit Bhattacharya of BasiGo, Bowofade Elegbede of Acumen Fund and Joyce-Ann Wainaina of Chui Ventures.

Both Leo and David are looking forward to this week’s AVCA Conference and Summit. “These conferences are, I think, extremely important, because they bring people together,” says Leo. “It's building the ecosystem of ideas, exchanging connections, maybe deals get done on the sidelines, people get to know each other, and get to think about other things, get ideas, and then implement them somewhere else.”

David, who is looking forward to welcoming everyone who will be coming to Nairobi, agrees. Such forums and the connections created are very useful, he says, not only for meeting people and exchanging new ideas, but bringing together needs and opportunities. “You get to encounter people who have certain needs, and people who probably have an answer to that. I will be looking to learn some things around emerging areas like green energy, climate ventures, and upcoming innovations.” 

The 22nd Annual AVCA Conference & VC Summit is being held at the Radisson Blu Hotel in Nairobi from Monday 27 to Thursday 30 April, gathering investors who collectively manage over $1.5 trillion USD in assets. It will explore the next wave of transformation shaping Africa’s investment landscape and examine how innovative capital models, strengthened local allocator participation, and emerging asset classes are generating and amplifying returns across Africa.