Future of Alternatives 2025: African Private Capital Can Flourish with the Right Reforms

With a growing population and increasing foreign investment, African private markets have great potential, provided essential economic and social policy reforms are implemented

Despite the relatively modest size of Africa’s private capital market, it is expected to grow significantly by 2025. Africa’s economic outlook has deteriorated with COVID-19, but with many African governments proposing ambitious economic and policy reforms, the market is set to become more attractive for investors. Nigeria, which recently overtook South Africa as the continent’s largest economy, is forecast to grow at more than 4.5% in 2024 and 2025, the fastest rate among the five largest economies (Fig. 1).

Fund managers are taking a favorable view of the region. More than a quarter (26%) of those surveyed by Preqin for Future of Alternatives 2025 say that Africa as a region will present the best opportunities for investment in five years' time.

A Growing Population and the Need for Reform
Africa’s population is among the fastest growing on the planet. In fact, the population of Sub-Saharan Africa is expected to double by 2050 to 9.7 billion, according to the UN. 

Despite being home to 17% of the world’s population, Africa accounts for just 4% of global power supply investment. In order to achieve reliable electricity supply, a substantial increase in investment is required. A host of African nations have in recent years announced plans to transition to lower-carbon energy systems. Most have long been over-reliant on a limited number of funding sources and state-backed entities, and any transformation requires market structure reform, which could help to mobilize an injection of private capital into African energy projects over the next five years.

Private capital professionals have the resources, skills, and technology know-how needed to make impactful investments in this field. Regulatory and policy reforms will need to be successfully implemented to attract private investors through structures that also ensure the more effective use of public capital. 

AfCFTA to Boost Intraregional Trade
Africa has long been dependent on foreign direct investment (FDI), which is expected to decline by 25 - 40% in 2020 due to falling commodity prices and the impact of COVID-19, according to UNCTAD. The impact of this on the region’s economies may not be as bad as the headline figure suggests, with UNCTAD pointing to deepening regional integration due to trade finally starting under the African Continental Free Trade Area (AfCFTA). 

The sources of FDI and trade are also changing (Fig.2). Chinese investment in Africa has been rising steadily over the past 15 years, with a total of $304bn in investment and construction between 2005 and 2020, according to AEI’s China Global Investment Tracker. A third of Chinese investment is in transport, a third in energy, and 11% in metals, according to analysis by the Brookings Institute. China has been Africa’s largest trading partner for the past 11 years, with the value of cross-border trade hitting $209bn in 2019, according to the Forum on China-Africa Cooperation. 

The opening up of capital markets in Africa has created opportunities for foreign investors, with a number of African nations having established stock exchanges as well as bond and money markets. The growing ambitions of countries like Turkey and India could spur a new wave of FDI into public infrastructure and private sector developments, in turn fueling domestic opportunities and the balance of trade, according to Investec. 

Turning the Tide
Most institutional investors have historically chosen not to invest in alternatives in Africa, but this may be starting to change. While 72% of investors we surveyed do not currently invest in the continent, 11% have plans to increase their investments by 2025. 

Preqin Pro tracks 540 Africa-based alternatives fund managers, with the largest number located in South Africa (252), followed by Nigeria (63), Egypt (41), Kenya (28), Ghana (18), and Morocco (13). A further 62 funds are based in Mauritius, which has pursued aggressive tax policies to attract international capital.

Further development in infrastructure underscores all other productivity and growth objectives. This will be the catalyst for a potential domino effect – private investment will fuel competitive returns, which in turn will drive economic and social growth, attracting further private investment. 

Download a data pack containing all the charts in our regional articles for Future of Alternatives 2025. For more predictions and projections from Preqin on the future of the alternatives industry, visit our Future of Alternatives 2025 Content Hub.