Sub-Saharan Africa is facing a reduction in private equity (PE) investments due to continued volatility in foreign exchange markets.
A survey by the African Private Equity and Venture Capital Association (AVCA) shows that currency volatility and currency shortages are among the biggest challenges facing private equity investors in Africa.
Around 75% of investors cited currency risk as important when investing in African private equity. More than half of respondents said currency risk has increased slightly or significantly over the past two to four years.
The March 2022 report notes that currency risk has the most impact for fund managers and limited partners at the time of portfolio exit.
“Against a growing appetite for private capital in Africa, concerns over illiquidity and currency volatility remain significant impediments to growth,” the report said.
“As Africa’s innovation ecosystem continues to grow and investor interest in the unlimited opportunities on offer grows, the demand for timely, reliable and competitively priced foreign exchange supply will not 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 company that manages a private equity fund.
The survey sampled 37 GPs and 26 LPs engaged in the African private equity market.
Nearly two-thirds of GPs said currency volatility had a negative impact on their returns on African equity, with 41% saying the impact was significantly negative.
Five percent of GPs said currency volatility had no impact on their returns on African equity
According to the survey, 60% of LPs said currency volatility had a negative impact on their African equity returns, and 40% said the impact was significantly negative.
“Similar proportions of LPs and GPs surveyed said they had experienced a significant negative impact on their African equity returns due to currency volatility,” according to the report.
According to the report, currency volatility is a defining variable for private equity investors when committing capital and exiting Africa-focused funds.
Nearly 75% of LPs said the impact of currency risk on their capital commitments to Africa-focused funds was significant.
Some 63% of LPs who deemed the currency risk significant only on exit.
“Most LPs report that they never experience delays in committing capital to African Focused Funds or in capital calls from African Focused Funds due to currency volatility,” the report said.
“However, when it comes to exiting Africa-targeted funds, a quarter of LPs say they frequently experience delays due to currency risk in Africa.”
According to the report, currency risk presents increasing challenges for private equity investors due to the fact that private equity markets are increasingly integrated.
The problem of currency volatility, which has long preoccupied investment professionals, has become a particularly pressing issue over the past two years as the global economy grapples with the Covid-19 pandemic.
At the height of the global pandemic, African economies witnessed capital flight from worried investors and downgrades by credit rating agencies to below investment grade.
Foreign exchange markets have also been heavily impacted by the Covid-19 pandemic, which in turn has affected the balance sheets, valuations and financial reports of financial institutions around the world.