Capital Formation in Africa: A Case for Private Markets

Executive Summary

This CFA Institute report examines the challenges surrounding capital formation in sub-Saharan Africa and explores the potential role of private markets — specifically private equity and private debt — in addressing the region’s structural investment needs.

“Capital Formation in Africa: A Case for Private Markets,” through collaboration with regional CFA Institute member societies and local institutional stakeholders, identifies policy changes that could facilitate capital market development and enhance the participation of local investors. Such changes could propel economic growth and gradually reduce the region’s reliance on foreign sources of financing.

Sub-Saharan Africa faces persistent structural economic challenges, including low investment growth, high inflation, and limited fiscal capacity. Despite these barriers, the region has significant untapped economic potential, particularly in natural and human capital. Our report evaluates whether private markets can serve as a solution or catalyst to harness this potential, either independently or in partnership with government initiatives, to drive sustainable capital formation and development.

Barriers to Capital Formation

The report highlights six prevalent barriers to capital formation across the markets analysed:

• Limited structural support for small and medium-sized enterprises (SMEs), despite these businesses forming the backbone of the economy
• Constraints in fundraising and access to finance
• An insufficient range of financial products and funding sources available
• Inconsistency in policies and bureaucracy
• Limited investor education
• Underdeveloped financial infrastructure

These systemic and policy barriers have been raised in several markets in sub-Saharan Africa. We review these points and propose policy solutions.

The research also discussed how the global shift from public to private capital markets involves risks that require careful management to support broader capital market development. These risks include impediments to public markets and a potential long-term decline in transparency.

This report marks the second instalment in the CFA Institute research series on Africa’s diverse financial landscape. It builds upon the remarks presented in our 2019 publication, “African Capital Markets: Challenges and Opportunities,” which introduced the leading African capital markets.

In this report, analysts from across the continent share their insights into the dynamics of public–private capital raising in their respective locales. The regions profiled include Botswana, Ethiopia, Kenya, Mauritius, Nigeria, South Africa, Uganda, West Africa (with a focus on Senegal and Cote d’Ivoire), Zambia, and Zimbabwe.

Key Findings

• Investment growth slowdown: Sub-Saharan Africa has experienced a decade-long stagnation in investment growth, exacerbating economic underperformance and hindering efforts to alleviate poverty.
• Rising public debt burden: Regional government debt has tripled since 2010, leading to high borrowing costs and constrained fiscal space, which in turn discourages public investment.
• Private market growth potential: Global private market assets have surged to USD13.1 trillion, presenting a potential alternative source of capital for Africa’s infrastructure and SME funding needs.
• Structural reforms and integration initiatives: Efforts such as the African Continental Free Trade Area (AfCFTA) and the African Exchanges Linkage Project (AELP) aim to boost trade, deepen financial integration, and enhance capital market liquidity.
• The rise of fintech in Africa: Mobile technology and digital financial services are expanding access to capital, particularly for small businesses and underserved populations.
• Public–private partnerships (PPPs): Mixed-finance projects combining public funds with private investments can be a crucial mechanism to mobilize resources for large-scale infrastructure and development projects.

Main Policy Recommendations on a Cross-Regional Basis

For regulators and policymakers:

• Create regulatory clarity and predictability.
• Improve private asset regulation.
• Strengthen and standardize corporate governance rules.

For governments:

• Consider the use of PPPs.
• Develop government-sponsored educational programs.
• Consider government-sponsored endowment funds.
• Initiate cooperation and coordination between public authorities and the private sector.

For investment firms and institutional investors:

• Prioritize upskilling of investment advisors.
• Design and market investment solutions for SMEs.
• Develop the private markets channel by aligning SMEs’ and startups’ long-term and stable financing needs with the private markets’ long-term investment horizon.
• Leverage local institutional investors (local pension funds, insurance firms, and sovereign wealth funds) as anchor and long-term investors in the capital markets.

Investment Landscape

Investment growth in sub-Saharan Africa has stagnated for the last decade, exacerbating economic underperformance and hindering efforts to alleviate poverty. Since 2010, government debt in the region has tripled, resulting in higher borrowing costs and limited fiscal capacity. According to the report, the combination of these factors discourages public investment.

Meanwhile, global private market assets have surged to USD13.1 trillion, presenting a viable alternative source of capital for Africa’s infrastructure and SME funding needs.

Various structural reforms and integration initiatives, such as the AfCFTA and the AELP (launched in December 2022, the AELP links seven African exchanges across 14 African countries), aim to boost trade, deepen financial integration, and enhance capital market liquidity. The rise of fintech in Africa is expanding access to capital, particularly for small businesses and underserved populations, while PPPs can serve as a crucial mechanism to mobilize resources for large-scale infrastructure and development projects.

A Case for Private Markets

Private markets have shown resilience and adaptability in the global financial landscape, making them a strong contender to address Africa’s financing gaps. The increasing shift towards private capital is fueled by factors such as lower regulatory hurdles, a growing pool of investors seeking higher returns, and an entrepreneurial preference for maintaining control over businesses.

In addition, the presence of a young and increasingly urbanized population in the region presents significant opportunities for investment in sectors such as education, healthcare, and technology.

One critical consideration is the role of international financial institutions and development banks in facilitating private market participation. By providing guarantees, co-investment structures, and risk mitigation mechanisms, these institutions can help de-risk private investments, making them more attractive to global investors. In addition, the region’s governments must play a proactive role in ensuring legal and regulatory stability, improving transparency, and reducing corruption to build investor confidence.

Policy Recommendations

To foster sustainable capital formation and economic development in Africa, our report suggests policymakers should create favorable conditions for private equity and private debt investments, ensuring regulatory frameworks support long-term capital deployment. Strengthening financial market infrastructure through accelerated capital market integration can improve liquidity and attract both domestic and foreign investments.

Governments should engage private investors in infrastructure and SME financing to alleviate pressure on public finances. Transparent and consistent financial regulations can increase investor confidence and reduce capital market fragmentation. Expanding digital financial services, such as mobile banking and fintech solutions, can democratize access to capital. And reducing trade barriers through the implementation of regional economic agreements should be prioritized to create a unified and competitive investment environment.

Overall, although capital formation remains a critical challenge for sub-Saharan Africa, private markets offer promising avenues for investment and development. By implementing targeted policy reforms and fostering stronger collaboration between the public and private sectors, Africa can unlock new economic opportunities and drive long-term growth. Leveraging private capital effectively can enhance infrastructure development, support small businesses, and ultimately improve the region’s economic resilience. The synergy between private sector engagement and policy support will be crucial in creating a dynamic, inclusive, and sustainable financial ecosystem for the continent’s future.