Africa should be considered a promising component of M&A strategies, in spite of the relatively small M&A market size and the impact of COVID-19 on economies, according to a new report by Boston Consulting Group (BCG).

According to BCG’s research, Africa’s M&A activity made up only 2% of the US$3.1-trillion global M&A market in 2019, and the impact of COVID-19 has slowed growth – but recovery is expected ahead of GDP growth recovery.

“We expect a sharp fall in volume and value, possibly 40% in 2020-2021, but followed by a gradual recovery of deal volume within 18 to 24 months, and a return to 2019 total value within three to five years,” says Alexis Bour, Managing Director and Partner at Boston Consulting Group, Johannesburg, and co-author of the report.

An earlier-than-expected M&A revival in Europe in the third quarter of 2020 suggests that, even with the uncertainty around COVID-19, a global M&A recovery has begun; BCG anticipates similar resilience in Africa.

Optimism about the future of investment in Africa is supported by the need to meet rising consumer demand for goods and services from Africa’s youthful and growing population, the research and analysis firm adds.

“Tech opportunities in financial, health, agriculture, and energy-related services are among the main engines of investment activity,” says Bour. “Urban business and financial centres are blossoming, and first-generation African tech entrepreneurs are launching start-ups in need of local and global capital. Financial hubs such as Casablanca Finance City in Morocco also connect the ecosystem of M&A players.”

Although Africa is a promising area for M&A activity, understanding of local context is key: almost 90% of buy-side M&A decision makers in BCG’s M&A survey said that managing uncertainty - economic volatility and other country risks - is their primary challenge.

To help guide investors, BCG has identified five main trends shaping the continent’s M&A landscape:

• African-led acquisitions on the continent are rising: Although the average value of foreign investors' deals was twice that of African investors (US$60-million for non-African versus US$30-million for African), African acquirers’ share of deal value has been rising steadily by about 5% per annum from 2012 to 2019

• More Africa-focused private equity (PE) investors are emerging: PE deal volume in Africa has been growing at about 6% per year since 2012; by 2016 there were more than 200 funds with upward of US$30-billion under management. Interestingly, the most successful PE firms happen to be African, while global firms have struggled to adapt their model to the African context

• Technology start-ups are attracting multiple investors: Fundraising for tech players increased by 64% per year from 2015 to 2019, driven mainly by investments in Fintech, with a focus on financial inclusion. Start-ups in three countries—Nigeria, Kenya, and South Africa—captured 80% percent of those funds

• African integration makes regional platform plays a reality: Regional markets and multi-country platforms can create scale, hedge country risk, and capture industry synergies and operational cost efficiencies.

• State-owned enterprises may soon be open for private capital again: Privatisation was the main driver of government M&A in the late 1990s and early 2000s, but no privatisation over US$1-billion has launched since 2006. A reversal of this decline in government M&A activity is expected for several reasons, including COVID-19 economic recovery interventions.