Reputations long outlive reality. When people think of the world’s second largest continent – 11.7 million square miles in size, a population expected to reach 2.4 billion by 2050 and a vast array of cities, towns, villages, landscapes and natural resources – many still think of what might be called the Five Ds: death, disease, deserts, dictators and drug lords.
This is particularly so when it comes to sub-Saharan Africa. However, investors with an eye on expanding their international portfolio post-Brexit would do well to grasp a startling new reality, says Runa Alam, co-founding partner and chief executive officer of DPI. For Africa is now a continent increasingly characterised by rapid growth, diverse sectors, a burgeoning middle class and ever-improving communications and infrastructure.
“Africa has the advantage of a young and growing population and one of the fastest urbanisation rates in the world,” Alam explains. “By 2034, Africa’s working-age population is set to be the world’s largest at 1.1 billion. Five of the 20 largest cities in the world will be in Africa by 2050 – Kinshasa, Lagos, Cairo, Khartoum and Dar es Salaam – and an additional 187 million Africans are expected to live in cities over the next decade.”
A more stable political environment
This, of course, begs the question of how that burgeoning population can be sustained. Once again, common perceptions here can be wide of the mark. “Despite a challenging commodity cycle, Africa continues to have abundant resources and is responsible for a significant amount of global commodity exports,” Alam says, “while the further penetration of technology is creating new opportunities across various sectors. Additionally, economic growth is to be further consolidated by a more stable and transparent political environment, with recent changes in governments experienced across the continent in 2017.”
“Africa is now a continent increasingly characterised by rapid growth, diverse sectors, a burgeoning middle class and ever-improving communications and infrastructures.”
With a period of currency devaluation having now passed, investing in quality assets in Africa couldn’t be more timely, according to Alam. Worldwide management consulting firm McKinsey pinpointed healthcare, telecommunications and financial services as African sectors that outperform the rest of the world.
“Ghana, Morocco and Nigeria, among many others, have implemented faster and more effective reforms to offer a more welcoming and competitive business environment,” she says, while also pointing out that a desire to improve the investment ecosystem and respect foreign investment rights is sweeping across the entire continent.
So, what should potential investors take into account? Alam’s experiences span more than a decade – the period in which DPI has been investing across the continent. “We’ve invested in some of Africa’s blue-chip companies in the healthcare, telecommunications and financial services sectors,” she says. “In our view, successful investing in Africa comes as a result of focusing on companies benefiting from the emerging African middle class, at an attractive entry price, and with the right partners.”
Ahead of the curve on corporate governance
Environmental, social and governance (ESG) factors are, unsurprisingly, paramount. “As African private equity was mostly started 20 years ago by development institutions, which needed to have their funds do high levels of ESG work, Africa has been ahead of the curve in terms of ESG compared to developed markets. ESG needs to be integrated into investment, portfolio management and exit work, as it drives profitability and corporate value retains employees and contributes to economic development while mitigating commercial risk. Successful exits in Africa are, in part, due to excellent ESG being integrated into an investee company.”
Alam stresses that due diligence should be implemented in the same way as it would be anywhere else: “Consideration should be given to institutionalisation, team, culture, incentives, adherence to investment and compliance culture. Of course, the investment thesis, its match to the African opportunity and the team are still some of the most important considerations.”
Consideration should also be given, she adds, to the fact that African private equity can be up to 25 years old: “There are general partners with track records, and this should be considered as a key due diligence item. It’s a proxy for all the issues mentioned above, along with others such as local knowledge, deal sources, ability to exit and so on.”
In short, do all you can to minimise potential risks, and the opportunities of Africa will dwarf them.
Nick Scott is editor-in-chief of the UK edition of Robb Report, and a regular contributor to FT How To Spend It, The Rake and Director magazine.
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