Sparking investment through greater transparency

Better access to corporate data could open an enormous middle market for investment in Africa.

Investors and corporates around the world, seeking higher yields and access to new markets, are eager to tap into Africa’s growth economies and capitalise from the strong fundamentals. Yet the high cost of access to information across African markets is a key limiting factor that constricts deal flow and business opportunities with the continent’s middle-market companies.

For private investors, a lack of data often means that proprietary investment screening and preliminary due diligence are time and resource intensive, resulting in fewer opportunities being evaluated despite a steady appetite to invest. Capital is not the problem, but access to it is.

According to investment advisers Aubrey Hruby and Joanne Yoo writing for the Financial Times blog, between 2010 and 2016, Africa recorded only about 1% of global private equity (PE) investments, despite contributing roughly 3% to global GDP. Furthermore, the majority of the transaction capital came from a few big investment firms targeting a limited number of deals.

Looking at 2015, for example, approximately 70% of the deals came from Helios, Abraaj and Development Partners International, according to Hruby and Yoo.

But what about the middle market? The African Private Equity and Venture Capital Association found that less than 2% of deals between 2007 and 2014 were of a value lower than $10m.

Yet, a 2016 Boston Consulting Group report states that approximately 11,000 African companies have revenues of $10m to $100m and assets of $20m to $200m. “Look beyond the narrow cohort of Africa’s corporate elite and you’ll see that the continent offers real opportunities. Some of the most promising targets in Africa are companies that are still off the radar of most funds,” says the report.

Once you go lower than the $10m revenue threshold, that number of companies easily jumps into the tens of thousands. The gap is clear, and private sector innovation can help narrow it. Challenges like regulatory stability and policy predictability require full government attention, but when it comes to corporate data and modern due diligence tools, investors should not have to wait for the public sector to catch up with their requirements.

In that vein, Asoko Insight is profiling Africa’s middle market to assist both investors and corporates looking to identify companies that are open for business. Our database analytics indicate a strong user preference for researching African companies with comprehensive profiles, which typically include a company’s financial performance and knowledge of its shareholders, management and board members.

More clarity on these data points leads to a greater rate of direct engagement between our subscribers and source companies and, consequently, deals being made. We see what better transparency can do on a daily basis.

To further scale private company data collection across Africa with the goal of generating more deals, Asoko has partnered with EY and African Business to launch The Africa Ranking.

The annual initiative is quickly becoming the most comprehensive ranking of Africa’s fastest growing private companies, and will be published in African Business by the end of 2017. As more companies seeking finance feel confident about sharing their information and embracing the corporate transparency required by the global investment community, private sector solutions can help usher in a new wave of mid-market private investment that has eluded many African economies till now.

Greg Cohen is director of The Africa Ranking and co-founder of Asoko Insight.