By Jason Voss, CFA
At the Investing in Emerging Markets conference on 1–2 March 2012, the CEO of the private equity firm Development Partners International, Runa Alam, presented a solid case for investing in Africa. As a long-time skeptic, I found many of the details about investing in Africa surprising. I left Alam’s presentation with a more open mind about the opportunities available in Africa. In fact, my opinion now closely matches that of my CFA Institute colleague Michael McMillan, CFA, who recently wrote “Africa: The Land of Alpha” for the Enterprising Investor.
Alam described the many misperceptions about investing in Africa, all of which I confess I believed, too. Among those are:
- Africa needs aid to develop.
- Commodities are the only way to invest in Africa.
- Corruption is rampant.
- High returns are not possible.
- Political risk and instability are large.
- Poverty and disease make investment impossible.
Alam tackled each of these myths. First, she pointed out that since the 1999 signing of the New Partnership for Africa’s Development (NEPAD) — a rigid economic development framework — most of Africa’s 54 nations are committed to growing their economies without the injection of foreign aid, focusing instead on sustainable economic growth.
Alam also highlighted that Africa is a continent growing by addressing its own internal economies and not just growing by exploiting its natural resources/commodities. In fact, she pointed out that Ethiopia is growing gross domestic product (GDP) at a rate of more than 15%, and yet, it has very little commodity wealth. Continent-wide, many entrepreneurs are specifically founding businesses to address the burgeoning middle class of Africa, which is estimated at 313 million people.
Surprisingly, Alam stated that in her 12 years of investing in Africa she has never directly encountered a single case of corruption! She acknowledged that corrupt businesses certainly exist throughout Africa and warrant investor caution. Alam said, however, that if a zero-tolerance-for-corruption attitude is in place from the very beginning of negotiating an investing relationship, Africa’s infamous corruption can be averted.
Many investors feel that Africa is a capital returns black hole where good money chases after bad. Yet, Alam presented many instances of investors earning average annual returns of more than 30% over the course of many years.
Of Africa’s 54 nations, only four are experiencing dangerous conflict. In fact, more than half of African nations have held democratic elections since 2006. Additionally, multiparty democracy continues to take hold across the continent, according to the DPI CEO.
The last myth that Alam addressed is Africa’s poverty and disease crises. While acknowledging these are large problem, she pointed out that health care is rapidly improving throughout the continent. However, she did not fully dispel the myth, instead quoting a statistic that seven of the top 10 fastest-growing economies in the world are African. What would the growth be without the poverty and disease crises?
Alam presented some facts about Africa designed to shift perceptions of the continent. For example:
- Africa is the second largest continent by land mass and is larger than the United States, China, India, Japan, and Europe combined.
- Africa has more than one billion consumers, placing it just behind China and India.
- Its labor force is 402 million people strong, which is larger than the entire population of North America.
- Africa is experiencing rapid urbanization, with 52 African cities that have a population of more than one million.
To invest well in Africa, Alam recommended that investors:
- Conduct active prospecting with on-the-ground visits
- Trust but verify management experience and track record.
- Conduct assessments of companies’ accounting, legal, anticorruption, and environmental practices.
- Conduct assessment of the economic strength and viability of industries.
- Invest time in the thorough creation of, and examination of, investment covenants.
What worries Alam about investing in Africa? The ability of her investments’ management teams to effectively manage their organizations as they experience rapid growth. This is a concern not too dissimilar from those of a money manager in the developed world and highlights that investing in Africa is more viable now than ever.
Beyond the pieces highlighted above, if you want more information on investing in Africa, you will also be interested in this video interview of Clifford D. Mpare, CFA, of Frontline Capital Advisors.