Globally, Venture Capital (VC) investment is on the rise. In 2018 $254 billion was invested into approximately 18,000 start-ups, a 46% increase from 2017’s figures. The US accounted for 52% or $131 billion of these VC investments. While 2019 figures are yet to be released, although it is expected that the increase of VC investment for the year will be at a lesser pace compared to the prior year, as a result of inflated valuations in traditional markets such as the US and Europe, the big theme for 2019 is that investors searching for yield are increasingly directing their VC investments to Africa and Asia. With US VC annual returns averaging between 10% and 14%, and European annual returns of between 3% and 10%, it is no wonder investors are looking to other markets in the hunt for superior returns. For instance, most VCs in South Africa target annual returns of at least 30%, and reflecting on HAVAÍC’s returns to date, with a total return of 85% per annum, it is no surprise that investors are turning their attention to the SA and African VC scene. From an activity point of view the US remains a dominant market in the world of VC investing. To put this into context, the US VC market is bigger than the entire GDP of South Africa, and any single country on the African continent, and is 100 times larger than the VC market in South Africa, as illustrated below.
US VC compared to South African GDP
US VC compared to South African VC
However in the world of investing, size isn’t everything, while risk adjusted returns are. Investing in early stage companies is inherently risky, thus investors should rightly expect high returns when investing in this space, and even more so in Africa, where the emerging nature of the geographies adds to the asset class’ risk profile. At HAVAÍC we believe South Africa and the rest of Africa can offer returns more than commensurate to the risk of investing in young businesses on the continent, largely because we are at a tipping point in Africa’s development, and the inherent dynamics of this favour the investor. Unpacking this further, with the adoption of new technologies at unprecedented rates, the rise of machine learning and advanced automation, and the global connectivity that the internet offers, developing countries are leapfroging their previously transcribed development trajectories, and are accelerating the socio-economic development of the entire African continent in parallel. Africa is grasping the promise of new technologies and its undeniable impact is already clearly evident across sectors such as agriculture, healthcare, finance, telecommunications, security and hospitality. And the pace of this adoption is only set to increase with more than 400 tech hubs having sprung up across the continent, with Cape Town, Nairobi and Lagos emerging as internationally recognized technology centres. In 2019, Africa has actively taken significant steps on its journey to a stronger economic future. In March the African Union launched the African Continental Free Trade Area (AfCFTA). In April, the South African government announced the launch of a new Affiliate Centre of the World Economic Forum’s Centre for the Fourth Industrial Revolution (C4IR). Additionally, the World Economic Forum has just launched the Africa Growth Platform. With Africa producing early stage high growth opportunities with international prospects at an unprecedented level, solving both uniquely African, and internationally relevant problems, more quickly and efficiently with innovative homegrown technologies, the world is taking notice. And with benefits from a competitive operational cost environment that results in lean operations and internationally competitive resourcing advantages, and with the African VC supply-demand dynamic in the favour of the investor, investors are able to invest on favourable terms. Furthermore, post investment, technology enables these investments to scale seamlessly both locally and internationally, and the pervasive mobile internet penetration (currently 90% of Sub-Saharan Africa) and increasing smartphone accessibility are giving rise to extensive opportunities for reverse innovation, specifically in rural and low-ARPU (average revenue per user) markets, as well as younger demographic groups. As a reminder, HAVAÍC allows investors to invest in these niche opportunities in South Africa and the rest of Africa that have the potential to deliver foreign revenue and generate offshore returns. Our investment thesis, to invest into early stage high growth post revenue African businesses where we add strategic and commercial value, and that use technology to scale internationally, is proving to be very successful, as illustrated by the below return graph.
HAVAÍC Annualised Return 2015 - 2019
SOURCES 1. Hedge Fund: Barclays Hedge Fund. 2. JSE: FTSE/JSE Africa All Share Index 3. S&P 500: Total Return 4. Venture Capital: Leland Thomson Reuters Venture Capital Index Fund 5. REITS: FTSE Nareit US Real Estate Index
HAVAÍC targets returns of at least 30% IRR per annum or 5X over a 5 year period. With our carefully constructed portfolio, pre and post investment support and involvement from our professional management team, as well as expert strategic support, our portfolio companies are performing well above this hurdle, with annual returns sitting at 85% (revaluations are based on actual market events such as a subsequent capital raise).
Furthermore, HAVAÍC increased its portfolio substantially in 2019, deploying ZAR40 million (~USD2.7million) by way of 5 new investments and one follow on investment. This trend is expected to continue with investments up to ZAR250 million (~USD17 million) being secured and deployed over the next 3 to 5 years, and is well placed to take advantage of the rising African VC tide.
HAVAÍC Portfolio Growth
With Global VC investment on the rise, and Africa increasingly becoming a beneficiary of this, with the returns we are seeing in this sector, now more than ever is the time to start investing in the African VC story. HAVAIC, the smart way to invest in African VC. Kind regards Ian Lessem