FINDING ROOM FOR IMPROVEMENT Before digging into what that step forward might look like, it’s worth taking a look at where the areas for improvement lie. One of the biggest issues in the sector is vintage bias, where investments made in certain years benefit or struggle due to market forces outside of their control. In an African context, this bias can be acute due to the more pronounced and volatile cycles. While the megatrends that make Africa a viable investment destination remain valid (a young, growing population with increasing levels of education and connectivity), those uncertainties can make timing an investment’s entry and exit difficult. In combination with other factors, such as the limited number of players in the African private equity market, this bias means that companies struggle to attract investors and valuations decrease. That, in turn, creates a vicious cycle where companies don’t achieve the valuations they should, disincentivising investors from taking chances on companies. Not only do they miss out on investments because of the bias, but the lower valuations further reduce an investor’s ability to exit investments. As a result, forced exits at suboptimal valuations become increasingly common. Africa’s smaller investor base and narrower investment vehicles also means fewer buyers and sellers. What buyers and sellers there are remain constrained, especially when it comes to buyout alternatives. Ultimately, this smaller secondary market means that the private equity environment is not able to operate to its full potential. While the megatrends that make Africa a viable investment destination remain valid (a young, growing population with increasing levels of education and connectivity), those uncertainties can make timing an investment’s entry and exit difficult. Africa’s smaller investor base and narrower investment vehicles also means fewer buyers and sellers. What buyers and sellers there are remain constrained, especially when it comes to buyout alternatives. Investment 76 Finance Monthly.
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