Table of Contents
- Executive summary
- 1 Introduction
- 2 Trends in international private equity
- 2.1 Introduction
- 2.2 Methodology
- 2.3 Post-2008 Sub-Saharan Africa’s capital flows
- 2.4 Private Equity Funds
- 2.5 International Listed Equity
- 2.6 Mutual and Exchange Traded Funds
- 3 Issues for development
- 3.1 Introduction
- 3.2 Methodology
- 3.3 A brief literature review
- 3.4 Private Equity Funds
- 3.5 International Listed Equity
- 3.6 Mutual and Exchange Traded Funds
- 3.7 Conclusion
- 4 Policy approaches
- 4.1 Introduction
- 4.2 Increasing investable opportunities: Small firms and “eco-systems”
- 4.3 Improving sophistication and pricing of risk mitigation
- 4.4 Further improvements in business environments
- 4.5 Ensuring financial stability
- 4.6 Responsible investment standards
- 5 Conclusion
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Private capital is needed for Sub-Saharan Africa’s economic development. This paper focuses on one element of private capital – international private equity.
Private equity has been the fastest growing flow to the region with a five-fold growth rate and more than $50 billion of inflows since 2008. Private equity now comprises approximately $12 billion annually and 20% of cross-border capital flows.
Growth in private equity investment in Africa has been driven by bullish investor sentiment about the growth prospects in the region – colloquially known as “Africa Rising” – as well as a search for alternative investments because of weak economic fundamentals in mature economies.
Private equity offers an unprecedented opportunity to accelerate economic development, particularly in the private sector, through direct and induced effects. The latter include employment, technology and knowledge transfer.
However, there are barriers to seizing this opportunity.
The region is suffering from an “overhang” of unused capital because of a shortage of suitable companies for investment. Firms are too small, lack sufficient human capital and are often within underdeveloped sectors that lack the economic “eco-system” that supports growth of individual firms.
Private equity investors have responded through “build, not buy” strategies but they are costly and need longer time frames for execution, reducing their commercial attractiveness.
Other investors, such as mutual funds, are responding by investing in the regions stock markets – creating moderate but growing risks of assets bubbles and financial instability.
Current policy is already acting in some key areas. Development finance institutions are active in building infrastructure, enabling improved business environments and by providing co-investment and risk mitigation.
These approaches are achieving successes in infrastructure – a critical area for economic development and for public-private partnerships.
However, in the small and medium sized enterprise sector, current approaches are insufficient. Seed capital for private equity funds, provided by development agencies such as the IFC and CDC, do not tackle the fundamental problems – a shortage of investable firms and of private sector “eco-systems”. Such approaches may even be adding to the capital overhang.
In addition, risk mitigation instruments from development agencies are seen as costly and inadequate in their sophistication and flexibility.
Much is to be gained from the current equity flows into sub-Saharan Africa, since they offer a unique opportunity to finance development.
However, policy needs to be developed to capture and encourage these benefits. Further research is needed to develop such policy.