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African-do Attitude

By Spear's

Josh Spero on the new breed of post-post-colonial investors who are recognising the huge potential of Africa
IT’S TIME TO banish the BRICs. The catchiness of this term has given the world an unsettling and inaccurate tunnel vision: four countries less united by politics, economics and culture you could not find. What is more, from an investment perspective they are not all the promising young starlets of the global economy they once appeared, with China the overheating mother-in-law, red in the face, and Brazil the constant bridesmaid.

No, it is time to look to Africa, the only major area of the world left to develop — with all the consequences for the canny investor that brings. When Zimbabwe returns 70 per cent (as it did for one fund), we must pay attention.

Neo-colonial notions are the instant spectre which appear whenever the West starts talking about profit-taking in Africa (although it must be remembered that Africa is not a united zone but dozens of countries, each with its own political and economic situation). While these thoughts are wrong, they are not unreasonable.

After Europe’s barbarous exploitation in the 19th century and the aid-not-trade quarter-century we’ve just lived through, we can hardly conceive of involving ourselves in Africa without cringing or recoiling, even if it is as a functioning investment destination. Yet that is exactly how we should start thinking about it: in Sub-Saharan Africa, there are 800 million people (half of whom are under sixteen) with comparatively little infrastructure and poor access to 21st-century telecommunications.

As Martijn Proos, senior investment adviser with the Emerging Africa Infrastructure Fund, puts it: ‘Tanzania, with 40 million people, has approximately 900 megawatts of installed power-generation capacity; my country, the Netherlands, has 16.5 million people and approximately 20,000 megawatts.’ If Sub-Saharan African countries gain anywhere near the capacity of European nations, it will lay the practical and economic groundwork for the creation of a gigantic middle class, the traditional drivers of political stability and financial growth.

This is not an opportunity many western executives and entrepreneurs are taking with due gravity, according to Thomas Cargill, assistant head of Chatham House’s Africa Programme (whose new report was published in early June and is available from its website). ‘There is a peculiar set of ideas, a perception that Africa is just about problems, which is increasingly divorced from reality and goes up all the way to the top,’ he says.

‘There’s a disconnect between the returns Africa is bringing to a company and the seriousness with which it’s being treated.’ Nor is the matter even being treated with the dignity of accuracy: Cargill relates an incident where a senior politician referred to the ‘country of Africa’. This thoughtlessness and those idées fixes, allied with the failure of previous hopes raised by over-optimistic cheerleaders for Africa, have turned businessmen off Africa.

This has led to one of Africa’s most intractable (financial) problems, a vicious circle of underinvestment: by failing to invest, the conditions are not created for further economic growth, meaning African banks will not lend money for long-term investments, and so on. That is why an increasing number of funds or companies from the rest of the world (most notably China) are stepping in, with private or public money, allowing investors to enjoy the proceeds of growth.
THE RANGE OF projects being backed seems to encompass nothing less than the construction of a modern Africa. The Emerging Africa Infrastructure Fund, backed by $150 million from several European governments, which was then leveraged up to $500 million by Development Finance Institutions and commercial banks, has put money into the development of a port in Ghana, a power plant in Kenya, a hydroelectric project in Uganda, a steel producer in Nigeria.

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It is worth noting that the governments behind this investment — in the form of PIDG (Private Infrastructure Development Group) — did not do this as charity, but ‘to help mobilise private investment’ through a ‘carefully crafted public-private partnership’: the West is treating Africa as a business proposition, not a needy hand. Once these projects are up and running, Africa will have gained not just the ability to increase its infrastructure but also several major new industrial players, perpetual sources of productivity, with all the trickle-down effects of the revenues generated.

The EAIF has also concentrated on telecommunications. Proos says it back-leveraged an equity provider in the Seacom project, the first to lay undersea fibre-optic cable along the east coast of Africa, because, without it, ‘All the people on the east coast were reliant on satellite connections, which were very expensive and don’t give you a lot of capacity. You connect East Africa to the rest of the world — it makes a big impact.’ Maris Capital’s Africa Fund has taken a similar line, backing companies which build cell-phone towers in South Sudan, one of the world’s fastest-growing markets.

The benefit to Africa — and thus the world — of this intensive investment in telecommunications is that it increases productivity. David Damiba, the managing director of Renaissance Asset Managers and senior portfolio manager of the Renaissance Africa Fund, describes a number of practical results of this: a market stallholder can call for more inventory when demanded or they can assess prices elsewhere; people can securely transfer money over their phones, creating a much more liquid system. (One such transfer system is called M-Pesa and is run by Safaricom in Kenya.)

Thanks to all this, ‘People earn a little bit more, their productivity increases, you have a little more income. Local companies hire more people, education ticks up, you have a classic move from rural to urban areas, consumption ticks up.’ People then start moving from low-income subsistence farming to buying imported food and clothing and other items; as a result, multinationals start to see double-digit increases in sales. GDPs — not just those of African countries but around the world — head upwards.

A third area of investment is the financial sector. Banks are needed at all levels, from those who will not yet undertake long-term project financing to micro-banks where people can deposit even $3 but at least keep it safely and legitimately. (Bringing down the size of the grey economy is one of the keys to increasing official productivity.) This lack of investment is especially true in the ‘missing middle’, says Coco Ferguson of Maris Capital, where businesses above micro-financing but below $5 million — the spark plugs of the economy — ‘have the potential to grow but can’t access capital’.
THE ALTIRA GROUP, an asset-management firm based in Germany, has also taken this tack. Altira set up its own investment team for Sub-Saharan Africa, the African Development Corporation (ADC). ADC is invested in a commercial bank in Equatorial Guinea, a merchant bank in Zimbabwe and a payment-processing company in Rwanda, running them as arm’s-length private-equity portfolio companies.

Wolfram Klingler, an executive director of Altira, has several reasons for investing in the financial sector: ‘It is at the core of economic growth. It’s savings, it’s making transactions possible — Africa’s much more advanced than we are in many areas of electronic transaction. It helps build SMEs. It gives people the opportunity to save. It finances large projects.’ The converse of this is that credit margins may be as high as 10 per cent because of the current difficulty of refinancing.

These are private equity or venture capital solutions, but it is also possible to invest in funds which manage liquid financial instruments. David Damiba’s Renaissance Africa Fund takes a multi-strategy approach, holding exceptional equities and fixed income such as Ghanaian sovereign bonds (which are Eurobonds priced in dollars) and Gabon bonds, which allows for traditional modes of asset allocation, managing your downside.

Some African currencies — the Zambian kwacha, the Ugandan shilling — rallied in 2009, even as less liquid African stock markets did not. The benefit of these instruments is that Africa is not currently highly correlated with the rest of the world, thus it can be used as a hedge, although as Africa integrates, correlation will grow.

It would be naïve, not to mention deceitful, to claim that this is the whole story. Africa is still flush with risks — corruption, accidents, incompetence, overheating — but risks can be priced in; what frequently does for Africa is the perception of risk, which may be significantly higher than the actual risk. David Damiba talks about the ‘arbitrage of risk’, which in itself allows for profit to be made through financial instruments on the difference between perception and reality.

Chris Hocking, head of the Africa team at Barclays Wealth, looking at the problem from another perspective, says that diversification is key, especially with the normal problems of corruption and instability present in emerging nations.

The first risk assumed by many businessmen thinking about Africa is intense, systemic corruption, from the president to the tax official to the foreman on your project. In a macro sense, ministers may be directing policy on the basis of secret deals and backhanders, although certain African countries rank highly on Transparency International’s Perception of Corruption Index: Botswana (37), Namibia (56), Ghana (69), Burkina Faso and Swaziland (79=) and Malawi (89) are all in the top half of the world.

It is the mid-level corruption which can be most aggravating for businesses, says Thomas Cargill of Chatham House — access to bids, for example, may be restricted. Corruption is, of course, an issue common to all emerging economies, but in Africa — never to be regarded as a homogeneous territory — it is especially important to examine countries discretely; for example, Botswana is far less corrupt than other countries because it is a ‘borderline de facto advanced emerging market’, according to Damiba, thanks to its risk profile and high bond rating.

There is a powerful disincentive to corruption inherent in business, too: politicians would be mad to let corruption turn away private capital, when it is that which causes the economy to expand.
RELATED TO THIS is the ease of doing business, and here African countries are either already prominent or are showing dramatic improvements. According to the World Bank’s ‘Doing Business 2010’, tax haven Mauritius is the African nation which makes it simplest for those trying to set up and run businesses (17), and Botswana (45) and Namibia (66) are well-established in this ranking. Rwanda is the world’s most reformed country (up 76 places to 67), with Sierra Leone and Liberia also changing fast.

Rwanda has in fact proved a very desirable location for investments, largely because it is being built up from scratch. Wolfram Klingler of Altira Group, which has invested in Rwanda, describes ‘a project to combine national identity cards with a payment card, which would ease a lot of things, transform the way people do business now and create a huge number of new opportunities’. Rwanda is then a launch pad for the rest of the East African Union (Burundi, Uganda, Tanzania, Kenya).

Similarly, in southern Africa, Zimbabwe has also been reconstructed, he says: it might have been a bad place to be, but ‘that was true two or three years ago. It is coming out of deep trouble, with the dollarisation of the economy. Zimbabwe has one of the best workforces in Africa, skilled people.’ Damiba reinforces this: ‘The quality of the management of companies that are listed on the stock exchange is very good, and they’re able to survive in the toughest of times by remaining cash-flow positive. Zimbabwe had an amazing year, returning over 70 per cent. Last year Zimbabwe was one of our best-performing assets.’

Risk can even be an inducement, or at least not a uniquely dissuasive force. Coco Ferguson says that Maris Capital has invested in some very risky markets — South Sudan and Zimbabwe, for example — but ‘to manage this our strategy is very much about control: we have seats on the board, a controlling interest, we roll up our shirtsleeves’ and get to work.

By combining this with traditional venture-capital methods and a particular kind of cash-generating business, the risk can be managed and less obvious opportunities seized. (This follows the traditional Graham and Dodd method of value investing, as preferred by Warren Buffett, where cash-flow-positive and dividend-paying companies with little debt are favoured.) All this also serves to start releasing the reservoir of demand which exists in Africa.

There is another problem which Africa faces, yet it comes from entirely the opposite end of the spectrum — not underinvestment or corruption, but too much investment, too much success. As the West has recently seen, leverage is a wonderful thing — until it’s not. Damiba worries that capital may come in too quickly, and ‘if you’re running a company well, people are going to start offering you more and more capital. It increases your earnings, but when there’s a hiccup, you have issues. I love the fact that there’s very little leverage in Africa, but you have to keep an eye on it.’

Africa’s close relationship with China is also of concern, not just because of the potential for China to gain control of most of Africa’s natural resources (40 per cent of the world’s) but also because they are quite closely correlated, so if China overheats, Africa will need to be cooled down, too.

Thomas Cargill does not seem to doubt that Africa’s immediate future lies in the investment currently provided by funds and companies, but perhaps ultimately it will be supported by multinational companies and African banks. Although he says most activists and researchers come from left-wing backgrounds, he now believes that ‘the best thing people can do is invest and set up businesses. It’s the free market that’s going to benefit Africa — and perhaps, more importantly, the rest of the world.’

Illustration by Femke de Jong

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