Thoughts into 2023 - Africa/Japan/Global Markets
VC to PE shift, "Mind the Gaps" in African Ecosystem (Exits, Asia LPs, etc), "KYL" (Know-Your-LPs), Market "normalization" not "correction", Final Words for 2022
Merry Xmas from Nairobi đ°đȘđČ
2022 was hell of a year, both from personal life changes and market volatility perspective. Whilst I know many of us are LITERALLY burned out from â22, whether you are a founder, GP, or even a LP, Iâd like to organize my thoughts around key trends for â23. Understandably, there are many great contents out there on Africa VCs/PEs (better than this one đ»), and most readers here would be rather keen on nuances around Africa-Japan, so I will attempt to touch on that best I can (please reach out for details via Linkedin or book a slot on Calendy.)
Just for context (for those who are 1st time readers), I started to write, initially in Japanese, regarding the development on African VC/Startup ecosystem for learning purpose, as well as some of the key activities happening from Japan into Africa (VCs, CVCs, M&A, etc). Below are purely personal opinions, just to open up interesting discussions đ
As always, I will try to stick with links/charts (visuals) best I can..
Shift from VCs to PEs - Whatâs in it for Japan
Global: Past 10 years of low-interest rate was favorable to VCs/Startups - This is behind us, and PEs are âVulturesâ looking out for discounted deals. Same happening in Japan where depreciating currency (yen) and staggering growth leaves them vulnerable to global PEs. Morgan Stanley report shows that PE-backed software transactions in the US returned 10.4x (primarily due to cost cutting, margin improvements, management change, etc). 2023 look like it would continue this trend - robust PE deals, VCs struggling to justify previous rounds, and startups needed to âget more fit (bottom-line > growth)â.
True-Price-Discovery starting from US/EU later stage: Cooley, a SF law firm, did a research on 1000+ deals in first 3Qs of 2022 in the US. They found that markdowns in US startups are revealing that Series D companies are marked 85% below previous valuation, Series C -74%, Series B -45%, and Series A -22%. Even in Europe, the most valuable private tech company Checkout.com, slashed its internal valuation from $40B to $11B (investors includes Tiger Global, GIC, Franklin Templeton) this month. These downrounds will continue to trickle down to earlier stage and emerging markets, and would expect PEs to be increasingly active for deals.
Africa: Though not as drastic as the US, at least directionally Iâd expect similar shift in Africa/EMs as well, especially for the companies that has surpassed Series B round and sitting on high valuations. 2021 to 1H22 has been a record fundraising environment in Africa, represented by likes of Swvlâs $1.5B SPAC IPO and Flutterwaveâs $3B Valuation Series D. However at 2022 year-end and looking back in hindsight, Swvlâs stock is trading 98% off its opening and even at the risk of delisting, and fintech mega Chipper Cashâs valuation has dropped by 37.5% from $2B to $1.25B. In my lens, many startups are still out in public at 2021~1H22 valuations, and have navigated through 2H22 with bridge rounds. Optimistically, the market/tractions will pick back up in 2023 to justify an up-round, but this is increasingly looking like a stretch with diminishing VC appetite. Companies such as 54gene, Maketforce, Sendy, Twiga, and Wave have all took the medicine early and laid off double-digit % of employees. As these de-valuation continue into 2023, itâs likely to see 1) market consolidations, 2) acquisitions from PE/strategics. As said in capital markets, 2023 looks to be a âbuyer's marketâ.
đŻđ” Japan : I actually see this to be a tailwind for Japan. Japanese corporates, and how they evaluate/assess companies is very PE-oriented mindset (IRR, ROIC, WACC), rather than VC-oriented mindset (PSR, MRR, ARR). This obviously is due to biased focus on âstrategic returnâ rather than âfinancial returnâ. For the past 10-15 years, Japan was always behind the curve in high-paced, growth-driven, Silicon Valley style environment. If the global and African market normalizes back to sustainable growth and strategic capital, then Japan could still have a role to play (that is, if they know it themselves..).
Japan must deploy in EMs: According to recent earnings seasons, essentially 1/3 Japanese firms are hitting RECORD PROFIT in 2021 despite Covid pandemic - Why? Its because many Japanese companies actually benefits from shortages of Natural Resources (Oil/Gas/Energy). However, the market participants (analysts, asset managers, institutional investors) knows this is one-off factor, and increasingly these companies (Trading Houses, Shippers, Airlines, etc) are being pressured to invest overseas for new avenues of growth (and in size đ”).
Where are the gaps in Africa?
Observing the ecosystem from Kenya, it comes down to Exits, Early-stage debt, and LP Diversification (would love to hear othersâ thoughts đĄ).
Exits: Lack of exit options has become one of the main discussions amongst VCs (I recommend âIn search for exitsâ from Abraham, and âIs the VC Model working in Africa?â from Nicole). First of all, we must separate exits for VCs and PEs. Given PE has relatively more opportunities to exit (notable deals from Amethis, Mediterrania, and Helios) in secondary transactions as well as IPOs, I am focusing more on VCs. Given the VC ecosystem itself is still nascent, it is only now that GPs (and LPs) are scratching their heads of how to cash-out its unrealized gains, and to recycle it for next investments. Referring back to Swvlâs IPO in Nasdaq and its turnouts, I feel there is renewed appreciation for 1) acquisition from strategic/PEs, as well as need to (re) explore concept of 2) Pan-Africa Stock Exchange. On the later, there has been recent launch of âAELPâ (African Exchanges Linkage Projectâ, which aims to enable seamless cross-boarder securities trading among 7 Africa stock exchanges representing 2,000 companies with $1.5 trillion market cap. Though itâs the right step forward, still taking it by grain of salt, given all that is required in addition to make it an attractive and lucrative market for global investors: liquidity, custodians, brokers, derivatives, etc.
đŻđ” Exits (Japan): Interests between African PEs and Japanese corporates are becoming increasingly align (but very little conversation), where PEs are looking to exit an position after 5-8 years, and Japanese corporates are looking for assets (dealers, distributors, assets, etc) which has healthy financials and proper governance. The most visible example of this is the Helios exit of Axela to Sojitz this year, but this is space is still untapped and worth exploring. Again, I believe 2023 will be interesting in this context.
Early-Stage Debt: Demand for Venture Debt has been increasing, active players in this space including Lendable and Stripe Capital, DFIs such as EIB and DFC, and newer fund such as Future Africa & TLG Capital. However, most of these playersâ minimum ticket size is $5M~ (Lendable, EIB), or if its lower ticket size, the interest rate is as high as 15~25% (Stripe). For early stage (Seed~Pre-Series A) startups looking for $500k~$1M, optionality for low-rate debt is very limited even if they have sufficient cash flow forecast. (If anyone knows alternatives, would love to hear!)
đŻđ” Japan has NEGATIVE interest-rates: Since 2016, The BOJ (Bank of Japan) has taken the NIRP (Negative Interest Rate Policy) for nearly 6 years, and only recently they relaxed it from -0.1% target to +0.5%. Nonetheless, Japan still has the lowest interest rate amongst the major economies. Weâve seen Japanese corporates/DFIs leveraging this to finance large infrastructure projects globally, but seldom in the startup financing context. One initiative that caught my eyes was the $10M Impact Private Debt initiative by Credit Saison (Japan) and Helicap (Singapore) towards SEA back in 2020. Details (ticket size, rates, etc) is not disclosed, but such initiatives from low interest-rate market could have potential to fill the much needed gap in Africa. (Something Iâd love to hear from JICA/Mega-Banks/etc.)
LP Diversification: European DFIs (followed by US and AfDB) and Family Offices has played an essential role in backing African VCs and PEs since inception. Players like EIB, FMO, BII, DEG, Proparco, IFC will continue to be indispensable part of the ecosystem, especially when it comes to setting the tones around Impact Reporting, ESG standards, and other key criteria. With that said, the African ecosystem has been gaining depth to an extent it should (or needs to) accommodate and diversify its LP base to 1) commercial investors, and 2) DFIs/Sovereign and Pension Funds in other regions. For both 1) and 2), there are untapped opportunities, but it cannot be achieved with 1-side effort.
2023 Thoughts (Summary)
Global Market: Interest rates will stabilize, but VC valuation still needs to reset.
Africa Market: Early-stage startups focusing on unit-economics will be rewarded. Increase in funds with thematic focus (climate, health, gender, etc).
Japan Market: Increasing pressure to explore M&A opportunities overseas.
Private Equity: Could enjoy robust market, both sourcing and exits.
VC: Selective VCs that can double-down will be rewarded, but âspray and paintâ strategy will struggle.
Startups: Runway should last 12 months min. Focus on bottom line.
From a Macro asset-allocation standpoint, Iâd recommend this piece from Morgan Stanley â3 Reasons Investors Should Look to Emerging Markets for 2023â. There is also an audiocast, here.
Final Words
2022 has been a tremendous journey, and 5 years ago on the trading desk of an investment bank I would have never imagined myself to be here. Especially, Iâve found much join interacting with local founders, VCs, PEs, and ecosystem builders on the continent (yes, you! đ) - constantly discuss what is necessary for the advancement of African ecosystem. Canât thank them enough đââïž
As we enter 2023, many of the previous norms will change, and we will realize (at times painfully) that we were actually in a marathon, not a sprint. One of the podcast I follow, âThe All In Podcastâ, suggested that startups should prepare for tough fundraising environment until 2H24 (yes, not 23, but 24). However we must embrace that this is market ânormalizationâ, not a âcollapseâ, and that when rule of the game changes, so do you. Howbeit, for all the reasons I mentioned above, I am cautiously optimistic of betting on African continent, and that it is one of the few markets that Japan can play a critical role, if with proper engagement and will.
Special thanks to Hinako, my intern who has to deal with me always, as well as Mitsui Logistics, AAIC, and JETRO who has given me opportunity to work alongside of them.
Happy Holidays!