Sub-Saharan Africa faces reduced private equity (PE) investment due to persistent volatility in foreign currency markets.
A survey by the African Private Equity and Venture Capital Association (AVCA) shows that foreign exchange volatility and currency shortages are some of the biggest challenges facing PE investors in Africa.
About 75 percent of the investors cited currency risk as important when investing in African private equity. More than half the respondents said currency risk has slightly or significantly increased in the past two to four years.
The March 2022 report notes that currency risk is most impactful for both fund managers and limited partners at the time of portfolio exit.
“Amid an increasing appetite for private capital in Africa, concerns related to currency illiquidity and volatility remain significant barriers to growth,” states the report.
“As Africa’s innovation ecosystem continues to expand, and investor interest in the boundless opportunities on offer multiplies, the demand for timely, reliable and competitively-priced sourcing of currency will only intensify.”
A limited partner (LP) is a third party investor in a private equity fund while a general partner (GP) refers to the firm that manages a private equity fund.
The survey sampled 37 GPs and 26 LPs engaged in African PE market.
Almost two-thirds of GPs said currency volatility had a negative impact on their African PE returns, including 41 percent for whom the impact was significantly negative.
Five percent of GPs said currency volatility had no impact on their African PE returns
According to the survey 60 percent of LPs said currency volatility had a negative impact on their African PE returns, and 40 percent said the impact was significantly negative
“Similar proportions of LPs and GPs surveyed reported experiencing a significant negative impact on their African PE returns caused by currency volatility,” according to the report.
According to the report, currency volatility is a determinant variable for PE investors when committing capital and exiting from Africa-focused funds.
Close to 75 percent of LPs said the impact of currency risk on their capital commitments to African focused funds has been important.
Some 63 percent of LPs that only deemed currency risk important at the exit.
“Most LPs state that they never experience a delay in committing capital to African focused funds or in capital calls from African focused funds due to currency volatility,” says the report.
“However, when it comes to exiting from African focused funds, one quarter of LPs say that they frequently experience a delay due to currency risk in Africa.”
According to the report currency risk presents growing challenges for PE investors owing to the fact that PE markets have become more and more integrated.
The problem of currency volatility, which has long been of concern to investment professionals, became a particularly pressing issue in the last two years as the global economy grappled with the Covid-19 pandemic.
At the height of the global pandemic, African economies witnessed capital flight from concerned investors and downgrades by credit rating agencies to below investment grade.
Foreign Exchange markets were also significantly impacted by the Covid-19 pandemic, which in turn affected the balance sheets, valuations and financial reporting for financial institutions globally.