Private equity firms are increasingly backing South African startups

Daba Finance/Private equity and startups

AFRICAN STOCKS AND FINANCENovember 4, 2023 at 1:57 PM UTC

The 2023 Southern Africa Venture Capital Association report reveals that in 2022, 11% of private equity (PE) firms' investments in South Africa were directed toward technology companies, a significant increase from the 3% allocation in 2021. This represents the highest investment allocation by the country's PE firms in any sector.

The report states, "Information technology increased from the ninth most attractive sector in 2021 to the joint top sector in 2022." This shift is substantiated by strong reasons: from 2020 to 2022, technology companies showed the highest revenue growth, with 52% of portfolio companies experiencing rapid revenue growth. However, 29% of tech companies also reported a decline in revenues during the same period.

Over the years, South Africa's private equity sector has raised substantial amounts from various sources, including pension funds, government, aid agencies, and development finance institutions (DFIs). In 2022, the total assets under management in the private equity sector reached around $11 billion. In comparison, venture capital (VC) funds raised only $555 million during the same period.

Key Takeaways

The shift of attention from private equity (PE) firms towards the technology sector in South Africa is a promising development, especially in the context of declining venture capital (VC) inflow over recent years. Notably, PE investments often target expansion and development-stage companies, a category that has typically faced challenges in attracting VC investments. While some VC firms have made efforts to provide late-stage capital to the ecosystem, there remains a considerable gap for follow-on financing for high-growth local startups with established traction. This growing interest by PE firms in the technology sector may help address this gap and provide much-needed capital to support the growth and development of promising startups. It reflects a positive shift in the funding landscape, offering more options for entrepreneurs and companies at various stages of their growth journey.

Private equity

Venture capital

South Africa

Startups