[vc_row][vc_column][vc_column_text]How we finance and manage our business in today’s South Africa is changing thanks to the increasingly important role of technology. Key developments in financial technologies are freeing small businesses and entrepreneurs from the evils of spreadsheets, outdated systems and shoeboxes full of receipts.
Several key trends are set to have an increasing influence on how small businesses do business in South Africa this year:
Cloud-based accounting will become the norm
Xero research conducted last year found that 66% of SME owners cited technology as “very important” and 55% claimed that smart devices and cloud apps have made running their business easier. South African small businesses have been slow to adopt cloud technology, due to poor internet connectivity and concerns over digital security. This looks likely to change in 2017 however as companies continue to invest in their cloud capabilities and put increased pressure on local providers to improve their services. Working in the cloud gives businesses a better overview of their finances and means that owners can stay connected to their data. Cloud software integrates with a whole ecosystem of add-ons, and includes features such as mobile receipt scanning, saving small businesses even more time and money.
Growth in digital payments
As technology helps small businesses understand what their accounts look like in real time, it is also transforming the way that business transactions are made and cutting down on the fees that SMEs have to pay.
Globally, tech giants such as Apple are driving demand for mobile payments. Although Apple Pay is not yet available in South Africa, the success of the South African equivalent, SnapScan, suggests that mobile payments are set to become increasingly commonplace in 2017. According to a 2015 FinScope survey, 37% of South African adults use digital payments monthly and this figure will only increase as connectivity improves. Only a few months ago, Mastercard’s Masterpass mobile wallet announced its arrival in South Africa through a partnership with SnapScan.
Crowdfunding and alternative finance is on the rise
According to Xero research, the majority of South African small businesses are self- funded, with 63% of SME owners reporting using personal savings while 20% found investment or a loan from a family member, partner or friend. Over a quarter (27%) of small business owners cited access to funding as the biggest challenge to starting their business.New methods such as crowdfunding are giving small businesses access to that all important cash injection to raise money for R&D, projects or seed investment. African projects crowdfunded R1.7 billion in 2015, according to the the Afrikstart Crowdfunding in Africa Report, from 57 different platforms. Business and entrepreneurship accounted for 21% of this investment.
Innovative technology is reshaping financial services by putting pressure on traditional business models. The growing popularity of alternative lending platforms, including peer to peer, will see small businesses no longer relying on traditional investors and finding finance from peers.
By Gary Turner
2016 has been an eventful year globally. Political and economic change and, to some extent, uncertainty became part of the landscape in much of Europe and the US. Notably, Britain voted to leave the European Union in June, and in November, the US voted to elect a President with a more insular focus on US interests.
The African investment landscape has not been impervious to the consequences of these geopolitical events. For example, the steady rise in the US dollar and the renewed focus on investment in the US has led to the continued flight of short-term capital out of Africa back to developed markets.
A fall in commodity prices last year, which started in 2014 (speaking principally about oil, coal and iron ore), had an even more dramatic impact on the macro economic landscape in sub-Saharan Africa. The region’s three largest economies (Nigeria, Angola and South Africa) saw their GDP growth slow and, in some cases, even contract as a direct result of this, leading to falls in the value of their local currencies.
All of this has led some sceptics to question the “Africa Rising” narrative that took hold in the years following the 2008 financial crisis, when economic contraction in the US and Europe coupled with a commodity boom led investors to Africa in their droves. I am not one of those sceptics, but I am an Africa realist.
In my opinion, Africa is still rising and will continue to do so for many years to come, spurred on by an undercurrent of immense, unrealised potential. However, the macro-economic landscape in 2016 to me represented Africa reaching adolescence from an investment perspective. With growth comes growing pains and volatility. Those private equity investors who understand this, and who are patient and see the long-term economic gains to be had from investing in Africa, will stand to benefit as the macro-economic environment improves in the coming years.
From a fund raising perspective, 2016 was a relatively quiet year compared to 2015. While 2016 saw a slowdown in deal activity (largely due to currency volatility in countries such as Nigeria and Egypt), there were a number of notable and interesting deals that show private equity investors in Africa are still willing to back companies where they see long-term growth opportunities.
Notable examples include the $80 million investment by African Capital Alliance and 8 Miles in Beloxxi (a Nigerian biscuit manufacturer), and the $115 million investment by Helios Investment Partners in Oando Gas and Power in Nigeria. There was also strong deal activity in Kenya, which has been a resilient economy in 2016, with Apis Partners investing in Direct Pay Online (a fintech company) and LeapFrog Investments making a $22 million investment in Goodlife Pharmacy.
While the commodities sector saw a slump, technology, financial services, financial inclusion and infrastructure were prominent in 2016 and this will likely continue in 2017. Mark Zuckerberg visited Kenya and Nigeria and invested $24 million of his own money into Andela, a company that trains African programmers in Nigeria and Kenya. CDC invested $55 million in a Nigerian internet retail company, Jumia, and Helios’ portfolio company Insterswitch acquired VANSO, a Nigerian mobile money company.
The appetite for investment into insurance and financial services also seems undiminished, with notable investments by Swiss Re in Leadway Assurance in Nigeria and DUET Private Equity’s investment in Fidelity Bank in Kenya. There were also some encouraging exits (the alleged paucity of which is often talked about in Africa’s private equity circles) with Actis selling Egypt-based Emerging Markets Payments to a Warburg Pincus portfolio company, and Helios selling Helios Towers Nigeria to IHS Towers.
Overall, the African investment landscape was shaped by the tumultuous economic climate last year, and it would not take a soothsayer to argue that 2017 will be equally eventful. Looking ahead, key themes and trends that are likely to characterise investment across the continent include:
Fund raising – While the macro-economic environment is challenging, those funds that can demonstrate a real track record of understanding and investing in Africa will continue to attract funds from Limited Partners. Of particular significance is the UK government’s proposal to increase CDC’s available funds from £1.5 billion to £6 billion. Watch out for the much talked about permanent capital vehicle (PCV), which will allow investors to hold investments for longer and ride out short-term macro-economic turbulence.
Macro-economics – Nigeria and South Africa account for half of sub-Saharan Africa’s GDP. A recovery in either or both of these markets will generate a significant rise in deal activity. In particular, a truly free-floating Nigerian currency would provide a tremendous boost for private equity investment by providing investors with stability. Economies like Kenya and Ethiopia will continue to attract investment.
Sectors – Technology and, in particular, fintech will continue to attract investment as Africa looks to this as an enabler (rather than a disrupter) to leapfrog existing bottlenecks. Similarly, infrastructure, particularly around power generation and distribution, will continue to attract investment. Following Denham Capital’s $250 million investment in GreenWish Partners this year, the appetite for renewable energy investment going into 2017 is likely to continue unabated
Weyinmi Popo is a partner at Orrick, Herrington and Sutcliffe. Weyinmi’s African work includes advising various Africa focused private equity sponsors such as Helios Investment Partners, LeapFrog Investments and Adlevo Capital.