African Private Equity: Missing the middle

African Private Equity: Bridging the Missing Middle

Africa's venture-capital scene suffers from a peculiar contradiction. On one hand, critics warn that too much money chases too few deals. On the other, the International Finance Corporation estimates that up to 84% of small and medium-sized enterprises (SMEs) remain un-served or underserved. Both views contain truth.

African private equity has matured considerably. In the 1990s, roughly a dozen Africa-focused firms managed around $1bn. Today, over 200 firms oversee more than $30bn. Between 2010 and mid-2016, they completed 928 deals worth $22.7bn, investing across every region of the continent.

Yet the market remains top-heavy. In 2016, three giants—Abraaj, DPI and Helios—accounted for nearly 70% of new capital raised. Given their size, these funds must pursue large transactions. But Africa has only 400 companies with annual revenues exceeding $1bn. Meanwhile, McKinsey estimates that over 10,000 African firms generate $10m to $100m annually—precisely the SMEs that could benefit most from private equity's capital, expertise and networks.

Jerome Kisting, managing director of Baobab Capital, a venture-capital fund based in Namibia, explains the approach: "While we inject capital into businesses, we are also involved in managing them. We believe the monetary investment is not enough on its own. People need access to financial management expertise, networks and other markets."

Despite this vast pool of potential targets, the market for risk and growth capital remains small and fragmented. The World Economic Forum has identified a persistent financing gap for businesses seeking between $50,000 and $2m in external capital—the "missing middle" that larger funds cannot efficiently serve.

This gap matters increasingly as Africa's economy evolves. As commodity prices fluctuate and national economic policies shift, the import and extractive industries that have long dominated are giving way to consumer-facing and service-oriented firms. These companies need equity financing tailored to their scale and needs.

A new wave of missing-middle funds could create a dynamic pipeline, growing smaller African companies into future targets for traditional private-equity players. The benefits extend beyond returns. A study by the African Venture Capital Association examined 199 companies backed by private equity between 2009 and 2015. These firms generated a net increase of 10,990 jobs, a growth of 15%. Financial firms in the study created 6,399 positions. Private-equity firms also transferred skills, implementing initiatives in human resources, corporate governance and management expertise.

More and better jobs produce broader positive effects on health, education and stability—all conducive to an attractive business environment. As Mr Kisting notes: "When you are in a developing country, it is difficult to remove the development impact of capital. It is going to have a socioeconomic impact."

The need is urgent. Millions of young people in sub-Saharan Africa require employment, and small and medium-sized companies offer the greatest potential for job creation. Yet African countries account for only 3% of global GDP and less than 0.1% of institutional investor portfolios.

Expanding investment allocations for first-time funds and emerging managers, alongside creating funds of funds that can bridge institutional investors' constraints and the small size of middle-market funds, would support the next wave of private equity in Africa. The more funds step into the missing middle, the more the continent will benefit.