The state of Africa's private market data

The state of Africa's private market data

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How much organization do we need for private market data in Africa? policies on data collection and its use differ across the continent. But is there a benefit of having a shared data blueprint in order to boost trade exchanges, capital flow, partnerships and acquisitions in Africa’s private market!

Yes, sounds like a no-brainer! but which data fields would be beneficial across different private markets in Africa?It takes a lot of effort to collect and organize data, and therefore a good start would be defining data which will end up being used across the many different financial and economic regions. Typically, most companies are interested in new clients/ customers, capital for growth or are looking to expand in new countries on the continent. For each of these reasons above, great data and visibility allow them to attract these opportunities.

The basic data room that most companies already have include: financial statements, a record of debt and liabilities, a record of current customers and competitors. As much as this data sounds basic and most companies have it, it’s not available in one place. when this data is put together, it provides new data and insights for the market.

When above data is put together , it becomes market data. A few examples:

• Cumulative income statements of all companies in the same industry gives you the market size.
• A record of debt and liabilities provide new financial institutions or funding parties in a new market with enough data and confidence for new financing.
• A history of past customers, competition, payables & creditors provide investors with the data needed to evaluate risk , business development and the potential to attract new partners.

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Current state of data:

The current growth in fintech and mobile money in Africa is increasing the record of transactions in Africa and changing the information asymmetry between Africa and investors. Transaction costs and history used to be expensive and non available compared to investment opportunities in developed markets. For companies that are listed on the handful of public exchanges in Africa, the brokerage fees, exchange fees, and other costs associated with trading are higher compared to their developed market peers. Investors often spend extra time and resources to gather proprietary information to perform their due diligence, further increasing time and expense costs.

Second, it is difficult to agree on risk, return, and price. The lack of data means that typical valuation methods, like an analysis of comparable transactions or discounted cash flows, become much harder to use. M&A experts rank the inability to agree on value as the top cause of deal failure across Africa. Estimating the cost of capital also becomes tricky when there is a lack of financial market data. For example, African banks struggle to establish the risk profiles of borrowers, which leads to excessively high interest rates and requirements for significant collateral.

Third, misperceptions about Africa are formed when developed-market-based investors are left to make assumptions based on the casual information to which they are exposed. Unfortunately, the international news about Africa is often negative, reinforcing pessimistic perceptions about investing in the continent. These distorted negative perceptions lead to higher perceptions of risk, higher costs of capital, and lower valuations compared to developed market investment opportunities. The continent is also often treated as a monolith in the minds of foreign investors instead of fifty-four separate and distinct countries, each with their own economic fundamentals, growth trajectories, and sector strengths. Unfortunately, these perceptions are widespread enough to eliminate some investor interest in Africa altogether.

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How current players are operating amid data gaps:

The specialist investor operating in Africa today understands these difficulties well and have developed ways of operating amid data challenges. These include :

• Developing deep local partner networks to vet management teams and conduct diligence.
• Using development-finance institutions (DFIs) to subsidize transaction costs, operating at lower margins to invest in proprietary research, employing creative investment instruments to manage downside risk amid data gaps.
• Having investment strategies that don’t rely upon bespoke, granular data. In fact, some investors embrace these attributes because of the potential to achieve outsized returns.

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It’s going to take a village:

To reduce data gaps, companies, governments, institutions, and investors must support both the supply and demand for data in Africa.

• First, DFIs and multilateral institutions should insist on the collection and dissemination of economic data and government statistics as conditions for sovereign investment. Institutions such as the International Monetary Fund are currently helping to create data standards and improve data quality through conditionality that requires country borrowers to meet specifically defined economic metrics, including commitments from countries to improve how they track data. This data then helps private-sector investors get a better understanding of the macroeconomic environment. DFIs and multilateral institutions should also help government statistics offices build capacity in collecting, analyzing, and disseminating data, and seek to release investment performance and loan default data to help investors better understand risk and return profiles.
• African governments should incentivize entrepreneurs to respond to investor demand for information and establish market data aggregation and reporting entities. Firms and associations like Briter Bridges, The Baobab Network, Asoko Insight, and the African Private Equity and Venture Capital Association as well as larger platforms like Pitchbook and Refinitiv that are building up their African databases as well, should be given subsidies, investment incentives, or partnership opportunities by governments. Consummer Research firms and management consultancies like KASI insights, Dalberg, and BCG that use surveys to capture customer behavior data should be pulled in to help with government census data collection in order to gain better insights about consumer demographics and trends. Governments must also establish permissive regulatory frameworks for mobile money and its data-focused applications.
• Public and private institutions should expand their support to Africa-curious investors and develop the capital markets ecosystem. Development agencies should increase funding designed to subsidize direct transaction costs and expand their role as de-facto brokers via the use of data/deal rooms. These are a low-risk way to showcase and educate potential investors regarding the nature of deals, thus increasing awareness and understanding. Governments should support, sponsor, and fund more initiatives in relation to Africa that are similar to the partnership between MIDA and USAID.

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A starting point:

For companies looking to grow in the same market or enter new African market: having guidance data to view industry transactions, competitive services and previous track record is a start in helping them to select the right market, suppliers or partners at fair market price.

For service providers & firms operating in a given market: showcasing their records, and having up to date data for their transactions allow them to attract clients and new investments.

For investors, PEs, or financial institutions, which do not have partner networks or teams on the ground to support their interpretation of data in their regions of interest, using expert insights might be a great alternative.

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