Investment Opportunities in Post-Pandemic Africa

It’s not an exaggeration to say that Covid-19 hit the world economically.  One of the world’s greatest economic crises in this century began as a health issue.

Because of Africa’s comparatively poor health system and the enormous number of people who live in close proximity in Africa’s major cities, it was first believed that the epidemic would have a devastating impact on Africa. Since the outbreak began in Europe and North America, Africa has luckily been spared from its harshest effects.

It’s not uncommon for investors to repatriate money from Africa to more developed and ‘safe havens’ in industrialized nations during financial crises, as is the case in developing markets during financial crises.

As a result of poor economic development, many African governments (and corporations) who have borrowed significantly in US dollars face a serious risk of a sovereign debt crisis as their capacity to service and repay these loans has been and continues to be damaged. 

New Opportunities

A large number of funds with portfolio firms in non-essential sectors such as non-essential retail, hotel, leisure, and travel have been adversely affected.

Medium and long term, private equity investors in Africa may look beyond the epidemic to broaden their investment objectives in pursuit of firms that are more robust to the post-Covid economy.

As a result of the epidemic, private equity investors in Africa have been confronted with one of the largest challenges: the depreciation of the main African currencies against the US dollar. Weighing in at a whopping 80% of all funds generated in US dollars, most of which invest and repay capital via US dollars, a fall in local currencies will almost invariably translate to a decline in portfolio performance.

Companies that had previously been overvalued by private equity investors may now have more appealing values, which might lead to opportunistic purchases in the near run.

Investors, on the other hand, are more inclined to look at firms that have a lower exposure to the US dollar or that have the potential to earn in the US dollar in the medium to long term, such as export-oriented enterprises or businesses that earn in dollars or other foreign currencies. The West African Monetary Union, which includes 14 countries in West and Central Africa, might potentially become more appealing to investors as a result of the CFA franc’s peg to the euro. Investors, including those who are Forex trading in Africa, are expected to devote more attention to technology-driven or technology-enabled businesses, such as those involved in financial payments and processing, data centres, and telecoms infrastructure. Agricultural and health infrastructure are expected to receive greater investment as well.

Financing and insurance are less likely to be negatively affected by the pandemic and should continue to see consistent private equity investment. Media, entertainment, and culture are among the African exports that have quietly increased in prominence and reputation. Some of the continent’s most important cultural exports, such as Nollywood and Afrobeats, have tremendous dollar generating potential. In recent months, Netflix has made significant investments in the development of African content. The revenue potential for this business will expand as internet penetration increases. However, economists predict that private equity firms will become increasingly interested in investing in this industry as it rises in economic relevance.

It is possible that private equity investors may hold onto their assets for extended periods of time because of currency volatility. 

The establishment of the African Continental Free Trade Area, which is expected to have a beneficial impact on African private equity in the medium term, is another good development. As a result, a single economic market for products and services would be created over the whole African continent, comparable to the European Union’s market. The freedom to trade tariff-free and unhindered throughout the continent gives a chance to build really pan-African enterprises with a broad continental reach. Given the limitations of national borders, private equity investors in Africa have frequently struggled to find scalable firms in which to invest their funds.

It’s going to be a relative value game throughout the continent. A lot of investors are considering whether they should invest in established countries, developing markets, or in Africa. Things to watch out for include developments in mature markets. Is there a change in sight for the US interest rate? Is there a chance they’ll rise? If it rises, Africa must compensate by paying investors for making it worthwhile to come to Africa in the first place by genuinely compensating them for their efforts. Debt sustainability will be determined by the actions of governments and policymakers. In terms of returns to investors, nations that came out of the crisis strong would perform well. There are also individuals who can access the capital market, as well as those who have access to the local market. An investor’s risk on the continent is suitably rewarded by this relative value play.

Investors must decide where they believe they may obtain the most value. Take government bonds, for example. Deep liquidity will be beneficial for nations that entered the crisis considerably stronger and who have been able to successfully navigate the debt renegotiation conversation and who still have access to global and local markets. That’s why certain countries are more attractive to investors than others. Africa’s banking industry was reorganized and overhauled in countries like Kenya, Ghana etc. before the crisis hit them. In addition, experts predict that marketplaces with a focus on social good will also provide a lot of excellent prospects. For example, let’s suppose that socially beneficial infrastructure development prospects are going to give excellent chances for investors who want to truly look at the continent.

There is little question that the epidemic has had a short-term negative impact on African private equity. As a result of this, the African private equity investment environment is expected to undergo even more transformations than it was before the start of Covid-19.