Africa is in strong need of capital. The World Bank estimates that the infrastructure alone would need another $90 billion per year and that is even though Africa features promising macroeconomic prospects: many African economies have grown by at least 5% p.a. over the last ten years; Africa has the youngest population in the world and its middle class is expected to triple in size by 2060, then amounting to around a billion people. The tremendous shortfall of investment increases chances for high returns even further. Moreover, some governments offer guaranteed returns on certain investments, sometimes even up to 20%.
“Many African economies have grown by at least 5% p.a. over the last ten years”
Africa lacks many of the conventional funding channels
One reason for insufficient capital inflow could be the lack of many of the usual funding channels of an economy: the financial markets are underdeveloped and the small amount of stocks listed are highly illiquid; banks are not able to meet the loan demand and still face the problem of corruption; high default rates in the past, wars and general political instability still frighten investors away and certainly pay their tribute to the respective country’s risk rating. In addition, many promising investment opportunities are rather set for the long run which might make them less justifiable and attractive for some investors.
However, one class of investments are again (after a sharp decline during the big financial crisis of07-09) increasingly entering the African market: private equity funds. With investments amounting to $4 billion in the last year, private equity funds experience rising acceptance in Africa, as they help African entrepreneurs to expand their businesses by providing stability and robustness. The bittersweet taste that accompanies the term ‘private equity’ in developed countries will be looked for in vain.
Tailored investment styles are needed
The African market still gives sound reasons to be approached with skepticism, even for the more adventurous private equity investors.
It is common practice for this specific form of investing to take over interesting companies, boost their performance and then sell them again after a short period of time. The first crux lies in the definition of “interesting”. Usually those firms are looking for deals with firms whose value is, at least, in the upper double-digit-million-dollars area which drastically limits the pool of “interesting” deals.
Secondly, the improvement of performance is often achieved through taking on leverage in order to boost returns which might be quite costly in Africa considering the general perception of the risk of the investment.
Last but not least, reselling the company can be difficult on Africa’s illiquid and undeveloped markets.It’s apparent that the usual practice of private equity firms faces obstacles that can be difficult to overcome. That is why they might be well advised to adjust their strategy according to the given conditions and circumstances in Africa. Patience and investment set-ups with longer time horizons have the potential to greatly pay off.
One example of successful operating in Africa is the 2011 founded advisory and private equity firm Eaglestone. The company has specialized on the Sub-Saharan part of Africa and is currently developing and launching private equity funds destined for three sectors: Real Estate, infrastructure and general industry/consumer services. The total target capital to be invested amounts to $650 million and further investments in the natural resources and agriculture sectors are planned.
For Pedro Ferreira Neto, founder and CEO of Eaglestone, the reason for the company’s success lies in the in-depth knowledge of the markets and conditions of Sub-Saharan Africa. Every employee has extensive experience and pre-knowledge of the area and is an expert in his respective fields. This stresses another important factor investors who approach Africa should bear in mind: Africa-specific expertise and thorough understanding of the local conditions and markets is not only important, but indispensable for success.
Africa needs investors that commit to their investments
Africa can put every capital inflow to use and private equity firms like Eaglestone, which pursue sustainable investment strategies certainly help local businesses and make a beneficial contribution, but are far from being enough to represent a sustainable engine for the continent’s development in the long run. Far-reaching actions, that for example fight corruption, need to be taken and attractive incentives for investors need to be created. The incoming funds should be used to address necessary structural changes as well as the underdeveloped infrastructure and financial markets. This would attract long-term investors that fully commit to their engagements in Africa. Or put differently: the funds should be used to further create reasonable and lucrative investment opportunities and by doing so ensure reliable and sustainable capital inflows in the future.