Emerging Secondary Funds in Africa: Catalyzing Investment in Cleantech and Renewable Energy
Secondary funds are gaining popularity in Africa’s startup investment scene, moving beyond their niche status. While fintech companies have led this growth, cleantech is now emerging as a vital sector. Investors are creating specialized funds to tackle the specific challenges in Africa’s clean energy and sustainability fields.
Secondary markets allow early-stage investors to exit, providing liquidity and promoting capital recycling. Though this concept is well established in mature markets, it is still developing in Africa. Traditionally, many institutional investors have hesitated to accept secondary exits in African startups. However, a recent report shows that 86% of African angel investors prioritize secondary exits, reflecting a growing sophistication among investors despite existing challenges.
The fintech sector has shown what is possible with secondary markets. For example, Moniepoint raised $110 million in a Series C round, enabling early investors to achieve partial exits through secondary share sales. Other companies, like Nigeria’s Kuda Bank and Côte d’Ivoire’s Julaya, also illustrate successful exits via secondary funding.
Cleantech presents unique challenges due to its long-term focus on impact and infrastructure development. Africa needs to speed up its clean energy transition. Global renewable investments reached $2.8 trillion from 2000 to 2020, yet Africa received only 2% of this total. By 2021, this share fell below 1%. Despite having 60% of the best solar resources globally, Africa accounts for just 1% of installed solar PV capacity, leaving millions without electricity.
Investors in renewable energy projects often find it hard to exit and reinvest, creating a bottleneck that hinders cleantech growth. To combat this issue, secondary funds like the Gaia Africa Climate Fund are emerging. This Cape Town-based firm aims to raise $200 million to buy secondary equity in renewable energy and sanitation projects, helping early investors exit and encouraging reinvestment in new initiatives.
Jon Marius Hønsi from Gaia emphasizes that secondary markets can bring long-term investors, such as pension funds, into essential projects. These investors can unlock capital for infrastructure while also obtaining stable cash flows through long-term power purchase agreements.
Why is liquidity important for investors in Africa’s renewable energy startups?
Title: Unleashing Africa’s Clean Energy Potential: The Rise of Secondary Funds in Startup Investment
Introduction:
In an exclusive interview with Jon Marius Hønsi from Gaia Africa Climate Fund, we explore the growing role of secondary funds in Africa’s startup ecosystem, particularly their impact on the cleantech sector. As the continent grapples with unique energy challenges, Hønsi sheds light on how these funds facilitate investor exits and stimulate much-needed capital in renewable energy projects.
Interview:
NewsDirectory3: Thank you for joining us, Jon. Secondary funds are gaining traction in Africa’s startup investment scene. Can you explain what secondary funds are and their significance in this context?
Jon Marius Hønsi: Thank you for having me. Secondary funds provide liquidity in private equity investments by enabling early-stage investors to sell their stakes in startups to other investors. This is particularly important in Africa, where access to such markets has traditionally been limited. By introducing secondary markets, we enable capital recycling, allowing investors to realize returns and reinvest in new opportunities, which is essential for a burgeoning startup ecosystem.
NewsDirectory3: We understand that while fintech has historically been at the forefront of this growth, cleantech is now emerging as a vital sector. What are some of the unique challenges cleantech faces in Africa?
Hønsi: Cleantech presents long-term challenges, often focused on substantial infrastructure development and impactful outcomes. For instance, Africa, despite having 60% of the best solar resources in the world, has less than 1% of installed solar PV capacity. Investors are often hesitant because renewable energy projects have long timelines and complex regulatory environments. This creates a bottleneck for exits, as investors are unsure when or how they can recycle their capital.
NewsDirectory3: How do secondary funds like Gaia Africa Climate Fund specifically address these challenges?
Hønsi: Our fund is designed precisely to tackle these issues. We aim to raise $200 million to invest in secondary equity within renewable energy and sanitation projects. By purchasing stakes from early investors, we help them achieve liquidity, which motivates them to reinvest in new opportunities. This fluidity is crucial for sustaining growth and innovation in the cleantech sector.
NewsDirectory3: You mentioned that 86% of African angel investors prioritize secondary exits. What does this shift indicate about the investment landscape in Africa?
Hønsi: This data reflects a growing sophistication among African investors. They are increasingly recognizing the importance of liquidity in their portfolios. The success stories from fintech, where companies like Moniepoint and Kuda Bank are enabling secondary exits, serve as a model for other sectors. It suggests that investors are moving past traditional hesitations and are eager to explore innovative financial solutions.
NewsDirectory3: What role do you see institutional investors, such as pension funds, playing in this emerging market?
Hønsi: Institutional investors have the potential to bring significant capital into vital projects. By participating in secondary markets, they not only provide much-needed funding but also benefit from stable cash flows via long-term power purchase agreements. This partnership can unlock infrastructure and contribute to Africa’s clean energy transition, making it a win-win scenario.
NewsDirectory3: what do you envision for the future of cleantech investment in Africa?
Hønsi: I am optimistic. With the increasing focus on sustainability and climate impact, I believe we will see more specialized funds emerging that address the unique challenges in cleantech. By leveraging secondary markets, we can enhance liquidity, attract larger institutional investments, and ultimately accelerate the energy transition in Africa. Our goal is to create a sustainable environment where energy innovation thrives, benefiting both investors and communities alike.
Conclusion:
As Africa stands on the brink of a clean energy revolution, the rise of secondary funds represents a pivotal shift in investment strategies. By fostering liquidity and encouraging reinvestment, these funds are poised to unlock Africa’s vast potential in the cleantech sector, ensuring a brighter, more sustainable future for the continent.
For more updates on Africa’s investment landscape, stay tuned to NewsDirectory3.
Other firms, like Blue Earth Capital in partnership with British International Investment, are also exploring secondary cleantech markets. They recently acquired stakes in three funds across Africa and Asia, marking progress in strengthening the secondary market in emerging economies.
Challenges remain, including misconceptions about investing in Africa. However, advocates assert that the risk of default for African energy projects is on par with European and American projects. Secondary markets can de-risk investments and free up vital capital for infrastructure. They can help accelerate renewable energy development while allowing early investors to shift funds to new opportunities.
Gaia’s fund aims to attract international investment while seeking partnerships in Kenya, Botswana, and Ghana to enhance local capital mobilization. Regulatory constraints limit many African pension funds from investing in non-publicly traded assets. Overcoming these obstacles can unlock local capital, supporting ongoing investment in cleantech projects.
The fintech sector’s experience sheds light on the potential of secondary markets in cleantech. Early secondary sales by companies like Moniepoint and Julaya show how investors can achieve meaningful returns while supporting impactful industries. Although secondary exits may not yield extraordinary returns, they provide essential cash flow for investors.
The rise of secondary funds in Africa’s cleantech sector indicates a significant shift in investment dynamics. By offering liquidity to early-stage investors, these funds can drive the growth of renewable energy and other critical infrastructure, aligning with Africa’s economic and environmental objectives. As secondary markets mature, they have the potential to become fundamental to Africa’s investment ecosystem, fostering sustainable growth and addressing urgent challenges.