Since 2020, investment flows into the startup ecosystem in Africa has been at an all-time high; hitting USD 5.2 billion in 2021; as reported by the African Private Equity and Venture Capital Association (AVCA). Ticket sizes for later-stage investments have consistently crossed the USD 100 million mark; and we are starting to see the capital deployed catalyzing an emerging trend of mergers & acquisitions across the continent.
As we celebrate the growth in capital inflows, we are cognizant of the gaps that exist in local capital markets in Africa. Most of these large ticket size deals are structured and closed outside the continent; with majority if not all the unicorns in the continent currently having their headquarters in the US or Europe. This is not by chance though. Structuring such big investment transactions for startups operating in multiple countries requires an interplay of advanced finance and legal expertise; as well as mature capital markets that facilitate efficient execution of the deals and flow of funds.
Capital markets in most countries across Africa are still at their nascent stages of growth; and this explains why most of the large ticket size investment deals are negotiated, structured and closed outside the continent. In addition, the financial services sector in most countries in Africa is not sufficiently capitalized to take on large investment deals locally. This has resulted to the syndication of deals with their global partners; who often fund the lion’s share of the investment.
The tide is changing in Africa though with the establishment of international financial centers in strategic cities across the continent. Among the leading financial centers in Africa we have Johannesburg and Cape Town in South Africa, Port Louis in Mauritius, Casablanca in Morocco, Nairobi in Kenya, Lagos in Nigeria and Kigali in Rwanda. The strategic location of these financial centers covers the southern, northern, eastern and western regions of the continent. Mirroring the location of these financial centers; of the 604 startup investment deals in Africa worth USD 5.2 billion in 2021; 23% of them were in Nigeria, 17% in South Africa and 13% in Kenya.
From the foregoing, we can infer that there is a correlation between the presence of strong financial centers and maturity of capital markets; and the amount of external capital inflow a country or region is able to attract.
Kigali International Financial Center
Launched in 2020, the Kigali International Financial Centre (KIFC) has an ambitious goal of positioning Rwanda as an investment hub for Africa that is located at the heart of the continent. KIFC has a two-pronged goal of connecting international investors with opportunities across Africa; as well as connecting African entrepreneurs with global capital.
KIFC plans to achieve this by developing an enabling environment; supported by a strong legal and regulatory environment, equipped with requisite financial services sector infrastructure and resourced with highly skilled and dynamic workforce. Combined, these building blocks will enhance Rwanda’s profile as a preferred investment destination for international investors targeting Africa. Among the key incentives offered at KIFC to international investors include 0% on capital gains, no withholding tax on dividends, 3% taxation for passive income, 15% corporate income tax for incentivized activities and no restrictions on capital repatriation.
In line with its vision and mission, KIFC launched the Africa Fund for Fintech in February 2022 during the Dubai 2020 expo. The USD 50 million fund is backed by MyGrowthFund Venture Partners which is a venture fund based in South Africa. The Africa Fund for Fintech will be domiciled at the KIFC with a goal of creating proximity between capital and fintech opportunities in Africa. In 2021, less than 10% of the private equity capital that was invested in Africa came from private equity investors based in Africa. Having an African fund as one of the first funds to be hosted at the KIFC and targeting local tech startups is smart move by KIFC in delivering on its promise.
The global private equity and venture capital market is currently experiencing a cool-off after an accelerated heat-up from 2019 to 2021. However, we expect this market re-correction to stabilize in the medium term, after which Africa shall continue with its strong growth trajectory in the long term. With international financial centers like the KIFC already having established the necessary structures and built the requisite infrastructure to support their growth; we expect to start having the large ticket-size private equity and venture capital deals being initiated, negotiated, structured and executed within the continent after the eminent global recession is over.
Author: Jeremy Riro