By Michael Denenga, Partner & Ashford Nyatsumba, Partner at Webber Wentzel

Water is the element that private equity (PE) and venture capital (VC) most closely resemble. When market conditions change, PE and VC investors naturally seek the paths of least resistance to protect and grow their capital.

There are four observable new trends and behaviours driving market conditions. Two of these trends include investors seeking greater flexibility in terms of location and structure, with Mauritius still a popular domicile and how new international, local and institutional capital sources have emerged in the African investment space, but with conditions. The other two, which we explore in depth in this article are how focused, narrative-supported investing is playing an increasingly important role in fundraising and how exit opportunities will continue to be scarce, with fund managers rethinking how they manage their capital over the long term.

Development finance is creating opportunities for fund managers targeting key areas

Development finance has been ever-present within the African investment landscape. What has changed over the last three to five years is the increasing willingness of these players to interact with PE and VC fund managers. What began as isolated cases has morphed into a steady stream of capital deployment, with development capital now representing an important source of funding in a constrained market versus the heady years of 2021 and 2022.

As observed from the interactions with fund managers across the continent, two investment categories are receiving outsized attention from development capital decision-makers. These are infrastructure and gender lens impact funds that consider environment, social and governance (ESG) factors.

According to a report by The African Private Capital Association (AVCA), infrastructure investments contributed to 37% of the total deal value reported during the second half of 2023. The infrastructure deficit across Africa's constituent markets will remain a challenge for decades to come, making it an attractive area for fund managers to consider when partnering with development capital. Beyond a public good, infrastructure plays a vital role in driving improved economic growth and access to opportunity, and its long-term impact makes it an attractive asset for investment.

ESG or impact investing, remains an important category for development finance leaders, with women-focused investing emerging as a leading ESG investment category in its own right. Detailed research highlights women's critical role in Africa's different economies, regularly wearing several hats simultaneously.

In both these instances, fund managers who have communicated a compelling story and demonstrated vision in the market have found willing investors on the promise of supporting initiatives on the continent with an infrastructure and gender lens impact. Investing is a data-led sector, but the ability to communicate an attractive and impactful proposition to investors has become an important tool for fund managers.

Exit opportunities in an African context will remain difficult, leading to capital continuation

Exits are an important part of the investment ecosystem, but in the African context, quality exits have remained difficult to come by. It's an aspect that remains at the top of many fund managers' minds, with similar asset class funds all targeting the same assets but facing limited viable routes to exit.  The 2023 AVCA report further notes that there were only 43 exists in Africa representing a significant 48% year over year decline. Only a few stock exchanges in Africa are attractive to initial public offerings. There have been listings continent-wide, and we've observed managers seeking to extend their investment vehicles' life and capital deployment periods.

As a result, continuation funds are gaining traction in the market. Where the limited-life duration of an asset manager's existing fund nears its end but there remains potential for growth or value creation in the existing funds portfolio of assets, managers are increasingly establishing subsequent or continuation funds to acquire the portfolio from the existing fund. This ensures that managers can maintain exposure to the portfolio's future performance and to give the assets in the portfolio more time to achieve their objectives in the new or' continuation' fund. The continuing lack of exit opportunities is also likely to drive consolidation in the market, with asset managers looking to leverage their experience and expertise across geographies within the region, by collaborating to give investors the best outcomes and secure capital in an ever-competitive landscape.

With difficult economic conditions unlikely to ease in the short-to-medium term, we expect investment professionals and fund managers to become increasingly agile in their search for capital investment, an environment which regularly breeds new approaches and innovations.