(Ecofin Agency) - Private equity struggles persist as investors focus on smaller deals and debt financing, awaiting brighter prospects in Africa and beyond.

Private equity in Africa has slowed down this year. According to the latest report from the African Private Equity and Venture Capital Association (AVCA), investments on the continent have fallen by 11% since the start of 2024, continuing a decline that began last year. The drop is due to global economic challenges, including persistent inflation and high interest rates, which have made investors more cautious. As a result, large deals have become rare, with smaller, less risky transactions now taking the lead.

By the end of the third quarter, private equity had injected $1.9 billion into Africa’s economy, a 53% drop compared to the same period in 2023. This amount is well below the five-year average of $4.2 billion, marking the worst start to the year for African investments in five years. The total number of deals, while also down, saw a less severe decline, with 287 transactions recorded since January.

This downturn in investment is forcing the sector to shift its approach. For the first time in five years, smaller deals—under $50 million—make up the majority of transactions, accounting for 66% of the total. Large deals have nearly vanished, with no transactions over $250 million, and deals in the $50 million to $99 million range have dropped by 92%. According to AVCA, this trend reflects growing investor reluctance to take on high risks during uncertain times.

Startups and Venture Capital Under Pressure

Venture capital, a key driver of innovation in Africa, is also feeling the squeeze. Though it still makes up a large share of activity—62% by volume and 52% by value—it has not escaped the slowdown. The number of deals has fallen by 21%, and the value of investments has been nearly cut in half, down 49% from 2023. In response to these pressures, African startups are adopting a defensive stance, cutting back on growth initiatives and focusing on optimizing their current operations.

Private Equity Market in Transition

The private equity sector presents a mixed picture. The number of deals has increased by 28% year-on-year, driven by buyouts and growth-oriented fundraising. However, this uptick in activity has not stabilized the total amount invested, which stands at $400 million, down 66% from last year. Deals under $10 million have shown relative resilience, with total investment in this category rising from $35 million to $55 million since the beginning of the year.

Private Debt Gaining Ground

Amid this volatility, private debt has emerged as a bright spot. Unlike other asset classes, it is attracting more and more investors. The value of private debt transactions has increased by 14%. This growth is driven by a search for more stable and flexible investments, well-suited to an economy marked by uncertainty. African lending firms, facing liquidity constraints, see private debt as a valuable source of funding to support their activities.

Africa’s Long-Term Potential Still Strong

Despite these setbacks, AVCA stresses that Africa continues to hold strong potential for investors willing to adapt and commit for the long term. The continent is rich with opportunities, but economic uncertainty is weighing on the outlook. Fitch expects a rise in non-performing loans as African banks, under solvency pressures, will need to strengthen their financial foundations. In response, measures such as Nigeria’s increased capital requirements aim to stabilize the sector, but the path to recovery remains challenging.