Venture capital beats private equity in new deals


The rise of venture capitalists has helped unlock immense value by introducing crucial but lacking ingredients that inhibit the growth and development of small and medium enterprises. PHOTO | SHUTTERSTOCK

Early-stage investors have taken a lead in the number of deals in the East Africa region over the past year, eclipsing traditional private equity deals that have been dominating inward investments previously.

Last year, deals data compiled by advisory firm I&M Burbidge Capital shows the region recorded 66 venture capital (VC) deals, up from 29 in 2021, while traditional PE deals declined from 38 to 26 in the period.

While both VC and PE fall under the same category of private capital, venture capitalists tend towards funding startups at lower amounts and equity stakes, while traditional PE firms go for more mature companies that are further up on the profitability ladder.

Kenya, which accounted for 76 out of the 111 total deals disclosed in the region last year, has become an attractive destination for startup funding, targeting the fast-growing ICT, financial services, agribusiness, healthcare, energy and logistics sectors.

The country attracts a larger percentage of the deals due to Nairobi’s status as the region’s financial hub, and a good supply of skilled, young labour.

“Venture Capital investments dominated investment activity accounting for 51 percent of all private transactions and 40 percent of the disclosed deal value," said I&M Burbidge Capital in their annual deals review for 2022.

"Traditional private equity investments declined for the third year in a row and accounted for 20 percent of all private capital transactions as well as 23 percent of the total disclosed deal value."

In addition to the rise in VC deals, the region has also recorded steady growth in inward investments by development finance institutions (DFIs), which have largely been targeting mature companies that are in need of capital injection for expansion or new product development.

The international financiers, who include some sovereign funds, were last year involved in some of the biggest deals seen locally, notably the transfer of a 40 percent stake in retail chain Naivas between two consortiums bringing together PE funds and DFIs.

“We note an increase in indirect asset investments by DFIs as well as an increase in the number of DFIs with a physical presence in Nairobi,” the advisory firm added.

The region also saw a resurgence of mergers and acquisitions after a decline in the previous year, recording 22 transactions compared to 17 in 2021.

The growth, I&M Burbidge said, was due to businesses seeking inorganic growth, and also due to consolidations necessitated by the negative economic impact of the Covid-19 pandemic.

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