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Reuters/Philippe Wojazer
Vanilla may be plain, but it’s reliable.
VANILLA INVESTMENTS

“Vanilla” private equity will help but not save South Africa’s tech scene

By Lynsey Chutel

An influx of cash may soon hit the burgeoning sub-Saharan technology scene. Johannesburg-based Capital Eye Investments says it is searching for $100 million to make the move from venture capital to private equity, with an eye on companies in the technology space.

“We could be the largest standalone private equity investment fund targeting the digital revolution in South Africa,” says CEO Dean Sparrow.

Sparrow describes PE as a more “vanilla” investment option, and the shift is likely to entice investors looking for reliable returns in a relatively new sector. Private equity has outperformed public listings in South Africa. While the value of PE deals in Africa fell by 70% last year, the volume of smaller deals ($250 million or less) went up.

But there are caveats for tech startups. South African private equity investors are more conservative than its venture capitalists; they prefer the sure thing to the next big thing. PE firms in the region are rooted in traditional industries like mining, and most don’t have the in-house expertise needed to shepherd a tech investment.

There are problems on the supply side, too. Africa’s relatively young startup ecosystem has not yet developed a steady stream of pitches with strong potential. And while even Silicon Valley can’t guarantee a lucrative exit, larger markets are still more attractive than, say, Kenya’s Silicon Savannah.

Capital Eye may have an advantage here: The company has its roots in UCS Group Limited, a now-defunct ICT company that provided systems for retailers. Capital Eye has backed startups like Emerge Mobile, which builds mobile point-of-sale hardware and software platforms, and Indaba Mobile, which creates cross-device community platforms for organizations. The new fund will be aimed at companies looking to expand in cloud technology, mobile and social platforms, the internet of things, and banking and retail software. The first close is expected in June.

Sparrow calls the move to private equity a “purely mathematical” decision, and it could be a blessing. But South Africa’s budding tech industry is unlikely to succeed until funders can find a sweet spot between risk and reward.