Until recently, it is very unlikely that Africa is a topic of discussion in the boardrooms of Japanese banks and investment companies. Japanese financial institutions have historically tended to focus on domestic markets and the country's “backyards” in mainland Asia.
Few Investment Committees felt the temptation to exploit Africa's investment opportunities. To some extent, it reflects the tendency towards risk aversion and lack of familiarity and distance, language and cultural challenges.
Even today, Africa receives only about 0.5% of Japan's direct investment.
However, there are clear indications that attitudes are beginning to change. Japan's largest banks, one of the world's largest financial institutions, all have established a certain level of presence in Africa. In addition, more and more small private market investment companies are increasingly engaged in searching for growth opportunities in innovative sectors.
The nature of Japan's involvement in Africa varies by asset class. However, the general theme is that Japanese investors tend to view Africa as the “next frontier.” This is an area where truly explosive economic growth can take off under the right conditions, just like post-World War II Japan itself. The current question is whether Japan's investment giant can convince them to make a big bet on the story of Africa's growth.
A great opportunity
Kohei Muto is CEO of Venture Capital Firm Double Feather Partners. He tells African businesses that it will have a social impact as he will first become interested in the continent and achieve “double revenue” through strong financial performance.
He founded Double Feather Partners in 2017 when African venture capital (VC) was in a very early stage. The company acts as a VC investor and at the same time provides advisory services to African companies in what is called the “Innovation Sector.” Muto cites population growth, particularly urban population growth, as an important opportunity for Africa. Inadequate transportation and logistics infrastructure represents a bottleneck that helps VC investors solve it, he says.
Double Feather is looking for a mobility or logistics startup that could potentially be the African equivalent of a company like Uber, Muto says. “We want to come and invest in solving the problem,” he says.
Muto believes e-Mobility could be transformative for Africa, providing the opportunity to repeat the continent's “explosive” success with communications and online payments. “We are looking at this in mobility, especially in the EV (electric vehicle) sector. ”
He argues that the chronic economic burden of importing fuel provides an incentive for Africa to switch to EVs and as consumer purchasing power improves, Africa has the ability to attract EV makers to the continent and build vertically integrated supply chains by leveraging key mineral resources. “We want to invest before the curve and create that industry early on,” Muto says.
Companies participate in the fight
Since 2017, the continent's VC ecosystem has grown quite a bit despite suffering from the same headwinds that have hit VC space worldwide over the past few years. AVCA, the private capital association in Africa, reports that 12 Japanese investors were active in Africa's venture capital last year, making Japan one of the 10 largest sources of investment from outside the continent.
Like Double Feather, prominent Japanese VC companies operating in Africa include Mobility54, which also focuses on the transportation sector. Kepple Africa Ventures invests in over 100 African startups and manages investment funds with Nigerian company Verod Capital Management. And discovered funds that have invested in the mobility, fintech and agritech sectors.
However, Muto highlights the unusual features of Japan's venture capital investment in Africa. In fact, it is dominated by corporate investors, including well-known Japanese brands, rather than VC companies. For example, Yamaha is taking part in the fundraising round for mobility startups in Nigeria, while technology giant Sony launched its own innovation fund in 2023 as a tool for its entertainment business.
“This is very unusual compared to the involvement of us and European companies in Africa,” Muto notes. He explains that the level of Japanese corporate venture capital activities in Africa reflects how many important cash reserves Japanese companies are building up to allocate to high-yield markets. “They don't do this from a CSR (corporate social responsibility) or development perspective. They do this for business and their survival.”
Muto believes that Japanese companies with a “zero historic footprint” on the continent would be unrealistic to build companies from scratch in Africa. Instead, investing in startups is a better way to gain foothold.
Muto believes this emerging trend is “very interesting” for the VC space in Africa. Japanese companies will serve as a group of investors ready to provide an additional source of liquidity and provide exit options for VC companies that may support startups in the first phase of growth. Meanwhile, he says Japanese companies can help startups provide know-how to support growth and development into future industrial powers.
Inching for bigger investments
At the other end of the investment spectrum, Japanese banking giants are also increasing their involvement in Africa in a variety of ways. Their investment practices are very different to the behavior of VC companies or venture investors, but their motivations for exploring opportunities in Africa are similar, says Tomo Ishikawa, Chief Regulatory Engagement Officer at Mitsubishi UFJ Financial Group (MUFG). The continent offers “the last remaining big opportunity for growth,” he says.
Nevertheless, the relative shortage of African projects is considered “bankable,” in other words, the risk of investments accepted by banks — continues to hamper the outlook for Japanese banks, who play a greater role as commercial lenders on the continent.
The aggressive trend is the growth of fusion finance opportunities to allow more sharing of risks in fundraising projects, according to African businesses. “Now, with all the tools available, we see more and more opportunities,” he says. “Finance is a network. You can't just do that, but when you see the other 10 people coming, you feel more comfortable raising funds because you can always share some of the risk with other peers.”
Ishikawa describes Mission 300, a World Bank and African Development Bank-led project that will connect 300 million people in Africa to electricity by 2030, an initiative that MUFG wants to support. While banks cannot take foreign exchange risk without local funds, Ishikawa says it will be a “game changer” if the World Bank and others can partner with MUFG to share risks in funding for a power access project under Mission 300.
Ishikawa acknowledges that there is something that needs to be done to address the growing awareness of risks among Japanese investors towards Africa. He also points out that there is a need for increased corporate demand in Africa for banking facilities to justify greater involvement from MUFG and others. But in the end he is convinced that Japanese banks will gradually play a major role on the continent. “Obviously, we are heading towards raising more and more funding for African opportunities.”
