Practical analysis for investment professionals
16 March 2015

African Horizons: Develop a Strategy for Africa Now Before It’s Too Late

By Nathan Jaye, CFA


An advisory council appointed by US Secretary of Commerce Penny Pritzker to expand business opportunities in Africa is now in full swing. The President’s Advisory Council on Doing Business in Africa (PAC-DBIA) includes two CFA charterholders with deep knowledge of Africa. Melissa Cook, CFA, is founder and managing director of African Sunrise Partners, a New York-based investment strategy firm focusing on Africa. Walé Adeosun, CFA, is founder and CIO of Kuramo Capital Management in New York City, which provides investment management services to institutional investors focused on alternative assets in emerging and frontier markets. In this interview with CFA Institute Magazine, they discuss the challenges and opportunities of investing in Africa, the growing importance of Africa for investors and the companies in which they invest, and why “the opportunity cost of delaying is higher than it may seem.”

CFA Institute: Why is PAC-DBIA happening now?

Melissa Cook, CFA: President Obama’s policy in the past couple of years has been to reorient US engagement in Africa away from foreign aid and toward business development. The idea is that productive investment that results in job creation will foster economic [growth] and then political stability in Africa.

The president hosted the United States–Africa Leaders Summit in August 2014 in Washington, DC. He then issued an executive order to create an advisory council. Secretary of Commerce Penny Pritzker has been charged with bringing the private sector together to provide good perspective and advice for the president as to how to better advance the administration’s goals.

This group is really serious. The secretary of commerce is extremely engaged. It’s a very important priority for her and for the president. It’s encouraging to see broad-based support from the White House and surging interest from investors and companies.

Walé Adeosun, CFA: The program has tremendous potential. US businesses can participate in the growth of the African continent by investing in African companies that end up buying equipment from the United States. While doing so, they’ll create new jobs in the United States and also provide capital to African countries. Since the president started this initiative a couple of years ago, there has been real commitment to the steps he initially laid out. When the president went to Africa two years ago, I was invited to join the trip in Dakar and Johannesburg. The president mentioned that his treasury secretary and commerce secretary would be coming to Africa after him, and they did.

What are the investment goals of PAC-DBIA?

Cook: If US institutional investors decided today to allocate 2% of their funds to Africa, the continent would have a hard time absorbing that much capital. There’s a push to develop capital absorption on a few levels. One is to support the development of local stock markets. Local exchanges are small but growing and becoming more professional and technically sophisticated. Another is to create a dialogue between African governments and global investors about what is needed in order to attract and retain more capital. Investors and companies need clear and predictable regulations. They need rule of law. They need deals that are bankable, and they need companies that can absorb the capital. The PAC-DBIA is working to develop recommendations for policy changes or steps the US government can take to accelerate the process.

What will you recommend to the DBIA?

Adeosun: I want to help get large pools of US capital — I’m talking about big pension plans, endowments, and foundations — to understand that Africa provides a lot of opportunity for growth and they can participate in that growth by providing capital.

Cook: I believe that there is too little knowledge in the investment community about what’s really happening in Africa and what the opportunities actually are. Looking at the corporate side, I see companies making what I would describe as “accidental decisions” about Africa based on what they hear anecdotally, not based on facts. My recommendations involve removing barriers that might prevent US companies from operating on the continent — not by compromising our standards but by working with African governments to figure out how to reduce corruption and improve the investment climate.

With improved knowledge and perspective, institutional investors can put pressure on companies they own to have a deliberate Africa strategy. This is essential to the long-term competitiveness of US firms. If US companies avoid Africa because they think the markets are too small, it’s too early, or business in Africa is too risky, they’re leaving the door open for global competitors to solidify market share on the continent and in other parts of the world. Once that happens, it will be very difficult for US firms to break into Africa’s fast-growing markets. African economies may look small today, but growth is rapid and the opportunity cost of delaying is higher than it may seem.

What do you mean by “accidental decisions”?

Cook: Perhaps somebody on the board has a golf buddy who heard that Nigeria is too dangerous and difficult, so the board has decided they’re not going to investigate opportunities in Africa’s largest economy, a country of nearly 170 million people. I’ve actually had Fortune 100 companies say that to me: “We can’t do business in Nigeria. One of our guys heard you can’t go there.”

To me, if you’re on the board of directors of a publicly traded company, it is bordering on fiduciary negligence to make decisions based on that type of “analysis.” Companies that might commission studies and do serious research on almost every other market in the world seem to believe that Africa is just a no-go zone and that it’s okay for them not even to think about their strategy in Africa.

Adeosun: But many countries are thinking about it already. We’re seeing the presence of many Chinese and Korean companies in Africa. The largest phone company in Nigeria right now is a Chinese phone company called Tecno. Its strategy is to grow the business in developing countries like Nigeria and then use the capital from that experience to come and compete with companies in the United States.

Cook: Look at the telecom equipment space, where Huawei and ZTE are the big Chinese players. People used to think Huawei was not to be taken seriously because it [allegedly] was shipping routers with Cisco manuals in the box. Now look at the market share that these companies have in Africa. They’re using African markets to gain experience, and they’re re-investing cash flow into research and development to become more competitive in Europe and other parts of the world.

Why is Africa attractive now?

Cook: Many countries are benefiting from improved governments. They’ve opened up major parts of the economy to private sector investment. Young people are going to work and driving rapid innovation. Some of the continent’s growth is driven by resources sales, so falling oil and copper prices hurt in several countries. But when you visit many countries, the growth that’s taking place is easy to see and it’s quite broad based. Reforms in power, agribusiness, banking, and communications are setting the stage for strong economic performance.

Adeosun: I don’t even think it’s so much resource based. I think it’s really consumer based. There’s an emerging middle class and a ton of people in the cities who have much more disposable income than we think they do. All of this is a result of the political stability that has occurred over the last 15 to 20 years as more governments in Africa have moved to a democratic form of government, which has improved the overall governance, including improved regulations and privatization of companies.
In 2000, when licenses were going to be issued in Nigeria for mobile operators, South Africa’s MTN [cellular network company] estimated it could establish 2 million Nigerian mobile phone lines. Nigeria had only 400,000 land lines at the time. Today, Nigeria has 120 million mobile lines. MTN Nigeria is probably one of the most profitable businesses on the continent, with revenues of US$5 billion and close to 60 million subscribers. They have EBITDA [earnings before interest, taxes, depreciation, and amortization] margins of about 60%. Where in the world do you get EBITDA margins of 60%?

It can’t be that Nigeria has 60 million wealthy people. Rather, it’s people who are not wealthy but have more disposable income than we think. That’s really where the phenomenal growth on the ground is. Recently, the Wall Street Journal wrote that of 200 multinational companies, the top country they were all interested in is Nigeria.

Cook: There are more than 700 million mobile phone users across the continent. When I tell my clients that — people who don’t know much about Africa — they can’t believe it. There’s so much power in this mobile phone base now. Even the most basic phones can transact mobile money. Governments can deliver services like tax collection, licensing, and voter registration via mobile phone. You have applications for education, health care, commerce, local information, and entertainment. The explosion of innovation that’s going on thanks to technology is nothing short of revolutionary.

Companies at the 2014 US–Africa Business Forum announced more than US$14 billion in investments in Africa. Which companies are among the leaders?

Cook: GE is leading the pack with major power-sector investments and other areas like aviation, transportation, and health care. Coca-Cola has been developing local farm capacity so it can source inputs locally. This strategy is a win-win, as it creates local jobs (and new consumers) while helping the company manage costs and currency exposure. IBM has a large research and development center now in Nairobi. Those are a few examples.

Why is having a local network in Africa so important?

Adeosun: In Africa, it’s very, very critical that you identify strategic partners on the ground who can help you navigate the landscape. While governance and regulations are improving, things are not the same as in developed markets. Having a local network is so critical — it leads you in the right direction and helps you avoid the minefields. You shouldn’t underestimate the power of having a local network. Also, there’s not a very extensive credit system in Africa, so how do you vet people? That’s where the local network comes into play.

Cook: From a research analyst standpoint, back in the days before investor relations departments offered guidance for earnings, you had to go out and actually figure things out for yourself. Africa is like that. You have to go to countries regularly; go to the stores; visit the companies; see the factories, the roads, and the airports; and see the consumer. You have to go into informal markets and look at what people are buying. And then you have to go back six months later and see what has changed! There’s no substitute. It’s the only way to understand what you’re actually investing in.

How do you develop that local network?

Adeosun: It takes time. Melissa has been traveling in Africa the past seven years. I have a natural network since I went to high school (boarding school) in Lagos, Nigeria. So I have a lot of peers as leaders of corporations or in government. Everything is a phone call away for me. But in the absence of that, it’s spending time, as Melissa has done over the years.

Cook: I’ve been there 30 times in the past seven years — to 13 countries so far.

What are the biggest risks of investing on the continent?

Adeosun: I’m not generally worried about political risks. If you invest in China, there is a concern your businesses could be nationalized in one day, given the regime. Africa tried that in the 1960s and 1970s with minimal success. I don’t think you have to worry about that in Africa, as most African countries have moved toward a democratic form of government. Nationalizing business is not the way to go, and nobody’s practiced that, except for Robert Mugabe in Zimbabwe. I don’t see any other African countries doing anything like what Argentina just did.

Africa is a lot about risk perception. One of the things President Obama is doing is lowering the risk perception in Africa and the associated risk premium. People should understand that this lowering of the risk perception isn’t very different from what has already happened in China, India, and Latin America. The risk premium should not be so high for Africa. It’s high right now because risk perception is high.

What kind of return on investment are you looking for?

Adeosun: We’re looking to make returns similar to most frontier markets. In most of the investments that we make, which is mostly private equity, we’re looking to make three times our money back. I think that’s fair for investments in frontier markets.

What are the main investment vehicles?

Adeosun: Most of the opportunities are in private investment. But last year, we saw a wave of countries issue sovereign bonds for the first time (at very attractive yields) that were largely gobbled up by American investors. These issues were three, four, or five times oversubscribed. You can invest in the equity markets, but the equity markets are not very big. If you include South Africa, the market cap of Africa is about US$1 trillion overall, with South Africa accounting for close to 80%. And it’s not very liquid. That’s why I say the bulk of the opportunity is still in the private investments. But there are also real estate and infrastructure opportunities that will develop out of public–private partnerships.

Cook: I visit local stock exchanges when I travel. They realize that there needs to be broader local retail and institutional participation. You’re seeing strong African companies that might’ve said in the past, “Oh, we don’t want to be public. We don’t want the disclosure, and we can fund our own growth.” They’re now looking at accessing capital markets. Many local companies, particularly in East Africa, are saying, “We need to be Africa’s multinational companies. We cannot do that as a private company without the right structure and access to cheap capital.” I encourage my clients to take a long view and look at these private companies, understand the drivers of the main segments of each economy, and think about when the time comes that investors can get access to larger chunks of African economies — how are they going to position their portfolio?

How important are the demographics right now?

Cook: Extremely important. Not only do you have young people coming into the work force, but you’ve got technology, which is much more easily adopted by young people. So there’s a demographic dividend if the governments can figure out how to create jobs. It’s a demographic time bomb if they don’t.

Adeosun: The other thing about demographics you’re seeing is a whole wave of reverse migration happening. You’re seeing a lot of Africans who grew up in Africa, came to the West to get an education, and are now returning home in droves.

How would you sum up interest among Western investors?

Adeosun: I think they’re slowly moving in the right direction, but there’s a long way to go. If you look at Africa’s overall market cap relative to global GDP, it hovers around 2–3%. You could make an argument that funds could have close to 2–3% of their assets in Africa, but most funds are so far away from that right now. Most of the interest we see right now is from the endowments and foundations. Very few of the corporate plans and very few public plans are invested, but we are moving in that direction.

Cook: When I talk to money managers and institutions, people make the mistake of saying, “Well, it’s only 2% of world GDP. It’s only 2% of my company’s earnings. It’s not important enough, and it’s too early.” I keep stressing that it’s not too early. You can’t turn on a dime and become smart and knowledgeable about Africa. You have to understand it now. If you don’t get in while it’s still early, it’s going to be very, very difficult, at least for corporate participants, to get in when things are more obvious to the rest of the world.

So it’s still the early stage now?

Cook: For major institutional investors, it’s still early because the continent’s ability to absorb capital is still limited. From a corporate standpoint, it’s not early. It’s actually almost too late in some cases. When you drive down the Mombasa Road in Nairobi from the airport to downtown, you will see every global brand of machinery, industrial equipment, vehicles, consumer goods, and agribusiness equipment. Everything is already there. There’s a view in the United States that Africa is a place of death and destruction and only a place for charity. That’s unfortunately still a view widely held among the US corporate community, and it’s just the wrong way to look at it. From a corporate investment and strategic standpoint, it’s not early.

From an institutional investor standpoint, it’s not too early to build knowledge and think strategically about not just your own capital in Africa but the companies that you own throughout your portfolios. Are they taking a smart, deliberate, strategic approach toward Africa?

If they’re not — and I saw this when I used to cover China a number of years ago — you end up with US or European multinationals that face severe pressure from Chinese competitors. If you’re not paying attention to that new competitive paradigm, you are taking major unintended risks in your portfolio. So I talk to people about the global perspective and how Africa fits into the competitive landscape.

Nathan Jaye, CFA, is a speaker on intelligence and a member of CFA Society San Francisco. The preceding article originally appeared in the March/April edition of CFA Institute Magazine

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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4 thoughts on “African Horizons: Develop a Strategy for Africa Now Before It’s Too Late”

  1. Richard Hurst says:

    As an Africa market watcher myself I found this very interesting. In many respects Africa is a fantastic market with many opportunities. However, we must be careful to note that Africa is not one homogenous entity and that every country is different with different regulatory environments and business cultures.

    Also despite strong competition from the Far East investors European entities have not retreated or ignored the opportunity. In this instance I am thinking of Ericsson and Orange which have developed sizable footprints across the continent and have grown their presence and revenues across Africa.

    Anyway love the fact that the discussion is being developed and that awareness is being created.

  2. Andrew Edwards says:

    I have to agree with Mr. Cook that Africa with it’s fast growing economy is a great place for investments now. As I am working in investing I have heard a lot about how productive is to put the money in development and infrastructure in the African region. For instance, Asian investment foundation Hermes-Sojitz invests 3 billion dollars until 2017 in building a 65-floors skyscraper and huge shopping malls in the West African region near Dakar.

  3. Edward Feldbrugge says:

    Avarage rating per country (sources S&P, Moody’s, Fitch)
    Date; 22-3-2015
    Time; 21:16:00
    Rating ;AAA;Australia ;Canada ;Denmark ;Finland ;Germany ;Liechtenstein ;Luxembourg ;Netherlands ;Norway ;Singapore ;Sweden ;Switzerland ;United States ;
    Rating ;AA;Austria ;Belgium ;Cayman Islands ;Chile ;China ;France ;Hong Kong ;Isle of Man ;Kuwait ;Macao ;New Zealand ;Qatar ;Saudi Arabia ;South Korea ;Taiwan ;United Arab Emirates ;United Kingdom ;
    Rating ;A;Bermuda ;Botswana ;Czech Republic ;Estonia ;Ireland ;Israel ;Japan ;Latvia ;Lithuania ;Malaysia ;Malta ;Oman ;Poland ;Slovakia ;
    Rating ;BBB;Andorra ;Aruba ;Azerbaijan ;Bahamas ;Bahrain ;Brazil ;Bulgaria ;Colombia ;Iceland ;India ;Indonesia ;Italy ;Kazakhstan ;Mauritius ;Mexico ;Morocco ;Namibia ;Panama ;Peru ;Philippines ;Romania ;San Marino ;Slovenia ;South Africa ;Spain ;Thailand ;Trinidad and Tobago ;Turkey ;Uruguay ;
    Rating ;Lower than BBB;Albania ;Angola ;Argentina ;Armenia ;Bangladesh ;Barbados ;Belarus ;Belize ;Bolivia ;Bosnia and Herzegovina ;Burkina Faso ;Cambodia ;Cameroon ;Cape Verde ;Congo ;Costa Rica ;Croatia ;Cuba ;Cyprus ;Dominican Republic ;Ecuador ;Egypt ;El Salvador ;Ethiopia ;Fiji ;Guatemala ;Honduras ;Hungary ;Ivory Coast ;Jamaica ;Jordan ;Kenya ;Lebanon ;Lesotho ;Macedonia ;Moldova ;Mongolia ;Montenegro ;Mozambique ;Nicaragua ;Nigeria ;Pakistan ;Papua New Guinea ;Paraguay ;Portugal ;Puerto Rico ;Republic of the Congo ;Russia ;Rwanda ;Senegal ;Serbia ;Seychelles ;Sri Lanka ;St Vincent and the Grenadines ;Suriname ;Tunisia ;Uganda ;Ukraine ;Venezuela ;Vietnam ;Zambia ;Gabon ;Georgia ;Ghana ;Greece ;Guatemala ;Honduras ;Hungary ;Ivory Coast ;Jamaica ;Jordan ;Kenya ;Lebanon ;Lesotho ;Macedonia ;Moldova ;Mongolia ;Montenegro ;Mozambique ;Nicaragua ;Nigeria ;Pakistan ;Papua New Guinea ;Paraguay ;Portugal ;Puerto Rico ;Republic of the Congo ;Russia ;Rwanda ;Senegal ;Serbia ;Seychelles ;Sri Lanka ;St Vincent and the Grenadines ;Suriname ;Tunisia ;Uganda ;Ukraine ;Venezuela ;Vietnam ;Zambia ;

  4. Investors should look at Africa from the standpoint of actual investment in production because that is where the opportunities are. For a young continent with a population of 1 billion, Africa provides energetic and inexpensive labor often cheaper than in many South-east Asian countries including in China. Ethiopia for example is now attracting significant Chinese investment in textiles and shoes for export to the United States.

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