Practical analysis for investment professionals
14 March 2012

Investing in Africa Now: Six Myths Debunked

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:

  1. Conduct active prospecting with on-the-ground visits
  2. Trust but verify management experience and track record.
  3. Conduct assessments of companies’ accounting, legal, anticorruption, and environmental practices.
  4. Conduct assessment of the economic strength and viability of industries.
  5. 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.

 

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, is a content director at CFA Institute, where he tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor. Jason also ran a successful blog titled What My Intuition Tells Me Now. Previously, Voss was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund. He holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: jason.voss@cfainstitute.org

2 thoughts on “Investing in Africa Now: Six Myths Debunked”

  1. Patrick Mugambe says:

    The prospects in Africa are endless. With the current global economic crisis, Africa appears to take the role of the “Bailor of last resort”! It is common knowledge that many the stimulus policies instituted by several western governments are still wanting-specifically in Europe where they are still yet to prove their worth. In the USA, significant results have been recorded especially in the auto and financial sectors. But the benefits are still yet to simmer through to the general populace which is most affected.

    China is reeling from its unrealistic/unsustainable economic growth rates and the ever tightening noose on many of its exports to both Europe and the USA. While Japan is pondering the next move after the ignominious economic halt it currently suffers due to unprecedented deficit that preceded the dreadful tsunami that devastated the greater north of the country.

    The statusquo positions Africa as the global bread winner. The continent is currently witnessing an influx of MNCs, and various Global companies with strong western and far Eastern roots, such as Halliburton, Tullow, Sinopec, even unusual retailers such as Walmart…and the list goes on!!

    Most of the corporate investments are mainly skewed towards minerals and raw material investments especially oil. Oil companies are investing billions of dollars in exploratory blocks especially on West African Shores, and along the African rift valley fault lines in addition to the traditional oil blocks in the north African deserts.

    China alone receives an estimated one-third of its oil imports from Africa (ChinaBriefing), which holds about 9 to10 percent of the world’s oil reserves. Whereas the Middle East produces the the biggest share of global oil supplies, its production yields heavy, sour crude that costs more to refine, while Africa produces primarily light, sweet crude oil that’s cheap and easy to refine into gasoline or diesel.

    The new investment pattern suggests that as economic crisis enters fiver pitch, both Western governments and their home corporations have decided to look beyond their BRICK emerging market “partners-in-business”, and now targeting selective African frontier countries for resources and markets in what they believe to be an “easier” solution to economic crises (for governments) that also promises higher yields while managing risk exposure (for corporations).
    African regimes on their part are not necessarily taking this “invasion” lightly. They undoubtedly but cautiously welcome the investments from the West and far East; but also stressing the need for partnerships to foster development! Gone are the times when most African countries entirely depended on aid and debt to sustain their economies. They have increasingly learnt to leverage their economic sustenance by using more of their natural resources and less of debt or aid.

    The results also suggest that Africa has to some extent benefited from Foreign Direct Investment (FDI) through more human productivity, improved management skills, infrastructural investments, increased exports, increased training, improved skills and health. and Africa is more connected to global markets. Foreign capital has also indirectly made the integration of countries into global economic networks in some African regions even more relevant, such as the the revitalization of the old EAC, with new members – Rwanda, Burundi, and eventually Southern Sudan.

    The down side of FDI is Africa’s small share of this investment pie which is at about 5% (center for global investment cgdev.org). Additionally, Investment has been strongly concentrated. In the mostly three countries (South Africa, Angola, and Nigeria) which
    accounted for 55% of the total and the bottom 24 countries for less
    than 5% according to cgdev.org. Additionally, there has been a long-standing concentration in the exploration and extraction sectors, particularly petroleum and minerals. Africa has also been choked by the dumping of substandard/ low grade and toxic products mainly from China, a feat that explains the increasingly tight conditions on Chinese products in both Europe and USA .

    Of course there are also political hiccups and corruption tendencies that are in the way of Africa’s progression towards achieving its hard earned benefits as a global bread winner. Some of these are unfortunately promoted by the foreign investors looking for preferential favors on major investment contracts (Another long topic in itself!). Overall, I think Africa has a pivotal role to play in solving the global economic crisis to its own betterment and that of other economies.

  2. Thank you for adding so much to the discussion!

    Jason

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