The volume of investment deals made by venture capital (VC) firms in East Africa outpaced total corporate finance deals in the first six months of 2024, compared with new investments made through mergers and acquisitions, private equity and ventures backed by development finance institutions, new data shows.
VC is seed capital to start-ups that need cash to set up operations, develop new products or supply chains.
Private equity, on the other hand, is capital for young, middle-stage companies looking to expand operations and explore new markets.
Data compiled by I&M Burbidge Capital shows that 68 disclosed investment deals were registered between January and June 2024, with a total transaction value of $1.02 billion.
Venture capital deals accounted for 38 per cent of the deals executed in the first half of 2024, while mergers and acquisitions accounted for 22 per cent.
Private equity deals accounted for 17 per cent, while DFIs accounted for 16 per cent of corporate finance deals in the period.
Despite the dominance of VC deals, the total number of deals in the period fell by 9.3 per cent compared to the first six months of 2023.
Read: Venture capital pool for Africa drops by $1.4bn
The total deal value also fell by 71.6 percent compared with the first six months of 2023, reflecting the challenging economic conditions affecting businesses, households and investor sentiment across the region.
“Since then, macroeconomic and fiscal environments have significantly shaped the capital markets landscape, with Q4 2023 and Q1 2024 having been some of the most challenging periods for business performance in the last five years.
“At the same time, trade players within the region, and from the rest of Africa (driven by limited growth opportunities), have taken to merging to survive or acquisitions at the currently prevailing attractive entry valuations,” I&M Burbidge Capital said in its findings published in July 2024.
The agribusiness sector generated 15 corporate finance deals valued at $238.4 million in the first six months of 2024, while the manufacturing sector generated nine transactions valued at $229.2 million in the same period.
The energy sector generated 10 corporate finance deals valued at $156 million.
“Venture capital funds usually prefer small deals that are easier to execute unlike private equity funds that target large transactions.
“There are so many venture capital players out there in the market that are doing small transactions, but their details are private,” said David Ivan Wangolo, a senior executive at Pearl Capital Partners.
He said that Uganda’s issues with the World Bank and some donors have led to a big reduction in the amount of private capital flowing into the market.
“I expect venture capital funds to maintain dominance over new investment deals done in the region’s investment space for the next six months.”
Read: PE, venture firms lead East Africa deals in 2023
Japheth Kawanguzi, CEO at the Innovation Village, said foreign investors see African markets as the last global growth frontier and believe strong growth opportunities need to be seized early to reap big rewards later.
“They see huge growth potential in start-ups based in the agricultural sector, healthcare and renewable energy areas. Donors are mainly involved in professional capacity building activities targeted at innovation hubs and other venture capital ecosystem agents,” he said.
“We expect strong venture capital inflows going forward as the market transforms itself to another level.”
Other sectors that generated notable corporate finance deals in East Africa were financial services, ICT and telecommunications, real estate and healthcare services.
The financial services sector recorded eight deals valued at $37.75 million, while ICT and telecommunications generated six transactions valued at $70.5 million.
The Real Estate sector recorded three deals valued at $227.5 million.
The healthcare sector generated three corporate finance deals valued at $24.2 million during the same period.
George Otim, an investment advisor at BDO Uganda, said there is a lot of enthusiasm among foreign venture capital firms about the prospects of Ugandan start-ups, and some are willing to invest money even before revenues are generated.
“Venture capital deals are usually smaller, and might amount to less than $500,000 per transaction, and are also easier to pull off. Private equity deals usually involve growth fundamentals that come with serious strings attached and take longer to execute,” he said.
“I don’t have details on venture capital deals that have been executed to date, but the dominance of venture capital players in the transaction stream is likely to continue for the rest of this year,” he added.