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Africa is the final investment frontier
Africa is the final investment frontier
Africa is the last place on earth where investors will be able to make super' returns. Over time, GDP growth in Africa is expected to outpace that in most developing economies, including the BRICS (Brazil, Russia, India, China, and South Africa) countries. And the middle market' - where companies are usually too small to attract institutional investors and too big to be of interest to donor organisations - is growing faster than any other.
There was consensus on both these points at the inaugural Super Returns Africa 2010 conference (29th November to 3rd December 2010), held in Fairmont Nile City, Cairo, Egypt, and attended by Limited Partners, including international institutional investors (pension plans, funds of funds, etc), Middle Eastern family offices and sovereign wealth funds, direct foreign investors, a wide spectrum of General Partners active on the continent (including pan-African and pan-emerging markets funds based in Europe, North America, and the Middle East), Africa-based specialist General Partners with a regional, country or sector focus, and South African buyout funds.
As pioneers in Africa's middle market during the past 15 years, we were delighted to see conference delegates realising that that's where creativity and the willingness to innovate are most evident. It's also the area in which the greatest impact can be made on job creation and skills development, thereby contributing to GDP growth, improving the relevant country's development and, in turn, attracting more investment.
In other words, it's where investors can do best while doing the most good.
There's a but, though. Capital isn't enough. As Sir Bob Geldof said in his closing keynote address, for investors to achieve the phenomenal returns that are possible, they have to do some handholding of the portfolio companies. Talent has to be pro-actively nurtured. Skills have to be transferred.
Any enterprise wanting to move into a bigger league faces challenges it's not encountered before. At the simplest possible level, there's a vast difference between managing five people and managing 200 or 2,000, while still focusing on the fundamentals of business - delivering value.
In Africa, however, there are additional complications. These were highlighted by conference delegates asking pointed questions about political stability, nationalisation, the legislative environment, currency risk, exchange controls, ease of doing business, and exit mechanisms.
They're valid questions. But, they do indicate the kind of traditional, first world approach to investment that isn't prepared to engage with Africa's realities and, therefore, won't be able to capitalise on the continent's potential for exceptional returns.
To get those returns, investors have to do just a little more work than they're used to. Yes, traditional financial analysis is essential. It's also necessary, however, to approach each investment opportunity and engagement with a set of guidelines that assesses the overall economic value added, and resolutely pursues answers to investment challenges in order to maximise the impact in value creation, profitability, and job creation.
An example is the relationship we facilitated between African Dynamics, a South African wholesaler and manufacturer of school and hospital meals, and Mafori, a non-bank lending and financial products institution.
As a supplier to micro-enterprises holding government contracts, African Dynamics was constantly confronted by delays in payment and, therefore, cash flow problems - caused by long government payment cycles. We introduced African Dynamics to Mafori Finance, which funds entrepreneurs like African Dynamics' clients. Mafori now provides capital and bridging finance to African Dynamics' clients, keeping both sets of businesses functioning.
Aside from benefiting all the enterprises involved, the interwoven business relationships ensure that underprivileged children and hospital patients are fed.
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