As the US strives to strengthen relations within Africa, private wealth is driving fintech and software advancement
As the US strives to strengthen relations within Africa, private wealth is driving fintech and software advancement
During a visit to Ghana in March, US Vice President Kamala Harris pledged to ‘double down’ on efforts to bring billions of dollars to the country and increase US presence in Africa. Harris visited the region as the highest-ranking official in the Biden administration to travel to Africa so far. Harris’ speech was designed to encourage US investors to capitalize on opportunities in the region, though for many investors their interest has already been piqued.
US investors in Africa are overwhelmingly private wealth firms with the agility and longevity needed for novice or emerging markets. Chief among them are foundations, which account for almost a quarter (235) of the near 1,000 US investors with exposure to Africa, according to Preqin data. Private and public pension plans come second and third, with 206 and 147, respectively. Meanwhile, endowment plans also rank highly among US investors in the region, with 135. At this point, the quantity of firms drops off significantly, with just 46 insurance companies having investment exposure to Africa.
The US, venture capital, and Africa
The majority of US deals in the region are concentrated in private equity and venture capital (VC). The African VC market has seen significant growth in the last two years. According to the World Economic Forum, African tech start-ups raised a record-breaking $4.8bn in 2021 and five of them achieved unicorn status (reaching a valuation of $1bn or over) during the same year.
The private capital market reflects this growth as well. Aggregate deal value for VC deals in Africa reached a record $3.7bn in 2022, up from $2.8bn in 2021 and $900mn in 2020 (Fig. 1). With such gains, it comes as little surprise that the African VC market is attracting more attention.
Zooming in further, these deals illustrate a clear focus on industries of interest. Within Africa as a whole, US investment seems to have locked in on two industries: software and financial services (Fig. 2).
Software deals accounted for the highest quantity of VC deals with US investors. Of the 562 US-funded VC deals in Africa in the last three years, software represents nearly 30% of the total, with 158 deals.
According to a study by the International Finance Corporation (IFC), the interest in software deals is likely to continue. IFC outlined that approximately 50% of all software developers in Africa are based in only five countries, the most prominent of which are Nigeria, Kenya, and Egypt.
In the last three years, there were 149 US-funded VC deals in the financial services industry (Fig. 2). Fintech has erupted in Africa, witnessing exceptional growth in recent years after the pandemic highlighted financial limitations within the region. For example, the VC fintech market in Sub-Saharan Africa expanded by 894% year on year to $1.6bn in 2021. The pandemic highlighted underlying financial limitations in the region and the response has been notable.
According to consultancy firm McKinsey, the African fintech market is expected to grow significantly over the next few years, with potential for revenue to grow by eight times the current levels by 2025. The Center for Strategic and International Studies, an American bipartisan policy research organization, identified Kenya, Nigeria, and Egypt as some of the most attractive fintech markets in the region.
Key emerging markets in the region
US VC deal activity in Africa is mostly concentrated in three major countries − Kenya, Nigeria, and Egypt − all of whom have recently introduced economic reforms to encourage foreign investment and economic development.
Kenya
Most notably, Kenya has enacted tax amendments in recent years to make itself more attractive to investors, including the Tax Laws Amendment Act (2018) and the Finance Bill (2019). The country has hosted the most US-funded VC deals in the region, with 163 deals in the last three years (Fig. 3). Kenya has strong telecommunications infrastructure and was described as having ‘the strongest macroeconomic fundamentals in Africa’ in the US Department of State’s 2022 Investment Climate statement. While challenges are still present, these advancements appear to have attracted the attention of US investors.
Nigeria
Nigeria is a close second, with 136 US-funded VC deals in the last three years (Fig. 3). However, the country continues to struggle with corruption, which can serve as an obstacle to economic development. Similar to Kenya, Nigeria has passed economic reforms designed to promote business development by ‘[improving] the business environment, including by facilitating faster business start-up.’
Egypt
After completing the three-year, $12bn IMF Extended Fund Facility program, Egypt has worked hard to restore investor confidence by implementing important subsidy and social reforms. The results of these efforts are reflected in the 86 US-funded VC deals initiated in the last three years (Fig. 3). The Egyptian government appears eager to capitalize on these advancements, announcing another wave of reforms aimed at increasing private sector investments specifically.
Private wealth through pension plans, foundations, and endowment plans are pioneering US investment in Africa. These investors show a clear focus on specific nations and sectors poised for expansion. It’s important to reiterate the continued presence of economic obstacles in the region, including corruption, shifting regulatory environments, and managing scarcity. However, early indications show US investors are answering Vice President Harris’ call to capitalize on the abundant opportunities in the region.