Updated: Aug 17, 2020
Financial crisises usually cause investors to take a pause and reassess approach. A prolonged coronavirus (COVID-19) beyond the 2nd quarter of 2020 may create a more acute risk aversion causing investment volumes to decline for the next 2-3 years - both in terms of new direct fundraisings and direct fund investing in companies. During the 2008/2009 financial crisis, total private equity (PE+VC) investment volumes declined sharply - by over 60% from $200 billion at the peak in 2007 to just under $70 billion by 2009. (Fig 1.) Currently Africa-focused VC funds have some ‘dry powder’ to invest. Their newly raised funds from prior years ie. over $500mil in 2019 alone - those volumes are set to drop-off 25-50% resulting in a lot lower equity capital available for African startups over 2021-2022. Until risk appetite returns!
Refinancing, debt leverage, and bankruptcy risks
Difficulties in obtaining equity funding, finding new loans, or refinancing existing business loans becomes a lot harder during recessionary times or crisis. This is likely to repeat in the current COVID-19 era.
During the 2008/2009 financial crisis bankruptcies skyrocketed over 300% - over 60,000 small businesses in the US went out of business due to the inability to meet their liabilities and financial obligations (Fig 2).
Financial leverage and business borrowing is likely to be reduced or stretched, as refinancing a loan during crisis times is near impossible and banking + other capital market liquidity dissipates.
Lending rates generally increase during times of crisis and recession - making debt servicing costs uneconomical.
(Fig .2)
A good strategy would be to extend a businesses current loan maturity, if possible, and not to add debt in the near-term. If business loans are due over the next 6-12 months build a liquidity cushion to meet the payments, as to avoid the risk of bankruptcy.
Ultimately, beyond the actual spread of COVID-19 cases to Africa, the short-term macro dynamics are negative and international investors have presumed a “risk-off” stance. Risk appetite and equity investing volumes for Africa will be lower over the next few quarters.
All doom and gloom for capital seeking African entrepreneurs? Short answer: NO
Investors with a longer-term perspective are still investing. Those who don’t have fully invested funds, HNWI (High Net Worth Individuals) and Africa focused business angels are participating in attractive investment opportunities.
· Businesses should expect an offset in terms of lower valuations, reflecting the new market conditions, however this could lineup entrepreneurs for better funding rounds post crisis.
· Government schemes, such as grants and interest free loans, are in abundance now with support from most governments.
· A businesses ability to pivot and manage through this crisis would demonstrate agility and management strength to investors who may have had these businesses on their pipeline radar - this would bode well for future capital rounds.
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