Five trends that will drive private equity in 2022

Bryan Turner, Partner at SPEAR Capital

The past year has been a seminal one for private equity, especially in Africa.

With economies across the continent still struggling after the ructions after 2020 and vaccine rollouts lagging behind those of developed nations, expectations were muted. But by the end of the first half of 2021, more than US$1.3-billion in private equity investments had been made across the continent and total investments for the year were set to exceed those of 2020.

While the past two years have shown just how difficult it is to be certain of anything, that’s a promising sign going into 2022. But numbers alone don’t tell us everything we should be on the lookout for over the course of the next year.

We should also look at the overall investor environment (which is increasingly influenced by concerns around the natural environment) as well as growth areas and industries.

With that in mind, here are five trends that will have an impact on private equity in 2022.

1. Ongoing focus on ESG and SDGs

There is absolutely no doubt that “business as usual” is no longer an option. Many historic business practices have proven to be damaging to people and the planet. In a bid to change that, many investors have started demanding that their portfolio companies meet environmental, social, and governance (ESG) standards or that they operate in line with the United Nations’ Sustainable Development Goals (SDGs). That’s unlikely to change anytime soon.

In fact, global ESG assets are on track to exceed US$50-trillion by 2025. While some have questioned how viable ESG really is, the problem isn’t with the concept itself but a lack of standards and regulation until now. That much became evident in October 2021 when fund managers started dropping ESG as a term in line with European greenwashing rules.

Ultimately, we’ll probably see today’s ESG standards become regulatory norms, and companies that want to stand out will have to operate in line with the more ambitious SDGs.

2. The African opportunity

The COVID-19 pandemic had a particularly damaging impact on Africa. Many economies which were among the fastest-growing in the world were brought to a grinding halt in 2020. Getting them back up and going in 2021 proved challenging.

That does not, however, mean that there aren’t opportunities for investors, far from it. In fact, there will be more opportunities in Africa, especially among companies that have faced the storms of COVID-19. They’ll need investment to rebuild and be profitable.

In particular, Africa will present opportunities for infrastructure and technology growth. When it comes to the former, investors will have to find projects and companies capable of going beyond the feasibility and planning stage. When it comes to technology, meanwhile, the most important thing will be identifying the companies that best take advantage of the growing levels of connectivity on the continent.

3. Sustainability

Having already alluded to the growing importance of sustainability for investors, it’s worth pointing out that Africa is ripe with opportunities for sustainable investment. Take electricity for example. The 20 countries globally with the lowest levels of electricity access are all located in Sub-Saharan Africa. With most forms of renewable energy now cheaper than fossil fuels and African countries particularly vulnerable to climate change, there is incredible potential for sustainable investment in this sector.

The same holds true for most industries and areas of the economy. And in some areas, it’s possible to sustainably build new economic verticals without the legacy factors found in more mature markets.

4. Ecommerce

COVID-19 has accelerated the adoption of ecommerce around the globe and Africa is no exception. In 2018, ecommerce accounted for 1.4% of South African retail, which doubled in 2020 and was expected to hit 4% in 2021. At SPEAR, we’ve witnessed this exponential growth first-hand in the shape of portfolio company MyRunway, which has gone from a niche fashion outlet to taking on some of South Africa’s biggest retailers.

While the potential ecommerce opportunity is big, it’s also important to note that successful scaling requires large amounts of operating capital. That means ecommerce organisations across the continent will be on the lookout for investment. More particularly, they’ll be looking for long-term investors who want to act as partners on their journey to scalability. That makes it an ideal avenue for private equity investors.

5. Resilience as an investment priority

The businesses that have survived the last two years are incredibly robust. That’s especially true for those that have done so in the economies hardest hit by the pandemic. There is, therefore, more opportunity than ever to find a good company in a country you wouldn’t typically think of as a top investment destination. We’ve seen this first-hand, having undertaken several successful investments in Zimbabwe despite the prevailing global investment sentiment being overwhelmingly negative towards investing in this economy.

It would, however, be remiss for any investor to go into these markets blind. They should, instead, partner with experienced investors that have a strong track record in these kinds of markets.

Opportunity in uncertainty
Ultimately, it’s unlikely that the uncertainty of the past two years will disappear in 2022. It might not even be dramatically reduced. But amidst that uncertainty there is opportunity. With the right understanding of a market, it’s possible to find companies that make things better for the communities they operate in and for the planet - and that provide real returns for investors.