Private equity (PE) funds have in recent years supplanted the capital markets as a preferred source of growth capital for up-and-coming businesses, which are attracted by less stringent terms required to access funding compared to public issuances.
This saw PE funds account for many of the larger recent deals recorded in the East Africa region, targeting sectors such as retail, healthcare, agribusiness and e-commerce.
The trend of large ticket deals is now shifting though, as the sector adjusts to a more difficult economic environment that cannot support the sort of returns that would justify the risk of making a huge bet on a single deal.
In a survey of PE firms across the continent, professional financial services firm Deloitte found that a majority of funds in East Africa (54 percent) now expect that deal sizes will fall below the $25 million (Sh3.2 billion) mark.
Last year, 74 percent of the PE funds they surveyed anticipated to do deals valued at between $25 million and $50 million (Sh6.4 billion).
“This is largely the case as the focus of most PE firms in the region remains on small and medium-sized enterprises (SMEs),” says Deloitte in the survey.
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“The reduction in the percentage of respondents anticipating larger average deal sizes from last year is partly due to the increased cost of doing business in the region, following widespread local currency depreciation against the US dollar which has negatively impacted the bottom line of import-dependent businesses.”
Similarly, across the continent, deal sizes are falling. In West Africa, 65 percent of respondents expect ticket sizes to fall to the sub $25 million range. In North Africa, the respondents seeing this lower quantum of deals stands at 56 percent, an in Southern Africa 37 percent.
At the higher end of the deal spectrum, just 12 percent of PEs in East Africa expect to see deals valued above $50 million, as opposed to 26 percent in 2023.
In terms of source markets and funders, PEs in the East Africa region expect to raise the bulk of their funds for onward investment from Europe (24 percent) and North America 23 percent).
Their peers in Southern Africa see South Africa as their key source market (29 percent), while those in West Africa expect the US to provide the majority of their capital.
In North Africa, the key source market is seen as the Middle East.
Governments and development finance institutions (DFIs) are the biggest source of funds for East Africa focused PEs, ahead of pension funds, endowment funds and fellow PE funds.
