The fundraising landscape for African businesses has undergone a significant transformation in recent years. Previously, receiving a term sheet from a potential investor was often seen as a done deal, with limited negotiation on pricing and other commercial terms. However, this dynamic has changed, and quality African businesses now have multiple financing options on the table at the same time. This shift has been driven by the growing number of investors, including banks, private equity funds, and family offices, competing for high-quality businesses.
A well-performing company with a credible management team, audited financials, strong cash flows, and a clear growth strategy may be approached by multiple investors simultaneously. Local and regional banks are willing to compete aggressively for good borrowers, sometimes offering financing at pricing that can be more attractive. Some investors are offering below-market prices to win clients, further increasing competition. As a result, management teams are now asking more informed questions about the terms of the investment.
The role of an advisor has also evolved in response to these changes. Advisors are now steering deals to completion and helping clients choose the most appropriate investor with the most well-suited term sheet. A term sheet is no longer the finish line but rather the beginning of the negotiation. Management teams are seeking clarity on various aspects of the investment, including the all-in cost of capital, security requirements, financial covenants, and control or influence.
Investors are being asked to provide more than just capital; they need to bring value to the business. This may include opening new markets, introducing strategic partners, strengthening governance, supporting mergers and acquisitions, facilitating subsequent financing, and helping with succession planning. The investor who simply provides money may no longer have a sufficient competitive advantage. Local banks often fall short in this regard, while value-adding private equity and debt funds stand out.
Despite the increasing competitiveness of the funding landscape, there remains a significant financing gap across Africa. Businesses that are too large for traditional SME lending but not yet sufficiently institutionalized for conventional private equity or international capital markets continue to face challenges. However, for the right businesses, the funding landscape is becoming considerably more competitive.
For investors, the question is no longer simply whether they can fund a company but rather why the company should choose them. Business owners should approach fundraising as a process of capital allocation and partner selection, rather than a search for the first investor willing to provide capital. This requires a more strategic approach to fundraising, with a focus on finding the right investor who can provide the necessary capital and value-added support.
According to Evans Wesonga, Managing Director of Noblestride Capital Investments Limited, the changing fundraising landscape presents opportunities for high-quality African businesses to secure funding on more favorable terms. As the balance of power shifts in favor of businesses, investors must adapt to a more competitive environment and demonstrate their value proposition to potential clients.
Key points
- Quality African businesses now have multiple financing options, changing the balance of power in fundraising.
- Investors must provide more than just capital; they need to bring value to the business.
- The financing gap remains significant for businesses that are too large for traditional SME lending but not yet sufficiently institutionalized.
