Investing in sub-Saharan Africa since the Financial Crisis

In 2008 investors woke up to the realities of the debt-fuelled extravagancies of the noughties and, for many people, the financial world metaphorically stopped turning.  At the time Africa was riding a commodities-driven boom, a process which helped turn it from Tony Blair’s “scar on the conscience of the World” to the poster boy for emerging markets investment.  So what has happened from an investment perspective since Lehman’s collapsed? 
 
As a starting point the continent’s star continues to rise, highlighted by dramatic economic growth in the intervening years while the economies of the developing world stagnated and shrank and other emerging markets experienced reduced growth.  A recent report by AfDB shows, one third of African countries are experiencing GDP growth of 6% or more this year.  There has been an increase in high profile and positive media coverage, for example Time magazine’s Africa Rising cover story last year, and more positive economic analysis.  Flights to and from the continent have increased, as have flights within the continent.  Investment banks, lawyers, accountants and other service providers have rushed to develop or expand “Africa desks”, entering into local partnerships and associations and developing regional hubs.  The diaspora continues to return, bring with it further skills, knowledge and creativity.
 
This article seeks to highlight a few of the investment developments since the financial crises.  It is, by its very nature and brevity, an overview and, as such, falls into the trap of treating Africa as a single entity rather than 54 separate countries, each with their own cultures, business practices and approaches.
 
On a micro level the costs of doing business in Africa, while still high relative to many other countries, are coming down – the costs of starting a business have fallen by more than two-thirds over the past seven years, while delays for starting a business have been halved.  Many countries in Africa are moving up Transparency International’s Corruption Perceptions index.  Increased liberalisation has opened markets to competition and legislative changes, such as enabling pension funds to invest in a more diverse range of alternative assets, has increased the availability of capital.  Falling inflation (an average of 8% in the 2000s against 22% in the 1990s) and reduced exchange rate controls have removed some of the traditional barriers to investors, as has increased political stability.  
 
Based on EMPEA research some USD 23 billion of funds were raised by sponsors in 2009, rising to USD 40 billion in 2012, although but this is still below the historical high of USD 66.5 billion in 2008.   Within sub-Saharan Africa fund-raising fell from a high in 2008 of USD2.2 billion to 950 million in 2009 before recovering to between USD 1.3 and 1.4 for during each of the following three years.  Set against one of the toughest ever periods for fund-raising, sub-Saharan Africa has yet to return to the heady heights of 2007 and 2008.  Regulatory change and LPs challenging the traditional two and 20 fee structure (which, especially the 2% management fee, are particularly important for funds in sub-Saharan Africa given the historically high deal costs, long transaction times and diverse markets) have contributed but possibly the greater challenge is one generic to the industry as a whole – the ability to persuade investors that the private equity model works and generates superior returns justifying the greater rewards.  However, there is better news in that anecdotal evidence points to increased investment by family offices, high net worths and other financial institutions and a reduced reliance on the development finance institutions to back sponsors.
 
The larger global sponsors are now focusing increasingly on the continent with global private equity behemoths such as Carlyle targeting a USD500 million fund focusing on sub-Saharan Africa and KKR recruiting ex-Helios partner, Kayode Akinola.  Increased specialisation is occurring within funds, either country-specific or sector focused, with power, healthcare, technology and consumer goods particularly standing out, further evidencing a maturing market for alternative investment funds.
 
While a considerable number of new funds have entered the market, especially at those targeting opportunities in the lower to mid-market a number of established platforms have been consolidating.  Examples such as Abraaj’s acquisition of Aureos, Jacana’s merger with InReturn Capital as well as with African-focused investment banking boutique, Exotix  and TLG integrating into international asset manager, Duet Group.  The recent merger between emerging market specialist investor, The Rohatyn Group, and Citi Venture Capital International is a further example of this. 
Long term energy policies involving privatisation and deregulation are becoming more common, recognising the brake Africa’s power deficit is having on its growth prospects.  A multitude of infrastructure projects are being initiated, are reaching financial close and are being completed.  As part of this opportunity investors are backing a series of continent-wide energy platforms.
 
As the financial crises took hold five years ago investment in Africa rapidly dried up but, while not entirely decoupled from the developed world and, particularly, commodity prices, the continent still experienced impressive growth in the subsequent five years.  Investment has since return, albeit as much through direct investment rather than via alternative asset managers and, increasingly, investment is focusing on secondary businesses and processing for raw materials rather than simply resource extraction.  This is only likely to increase as wages and production costs increase in other emerging markets and as increased political stability and deregulation facilitate an inherently entrepreneurial culture.  The key is to what extent this will ultimately be financed within the continent by the new African entrepreneurs or by external capital. 
 
Hugh Naylor is head of Private Equity at Trinity International LLP.  He can be contacted on +44 (0)207 997 7049 or alternatively via email: hugh.naylor@trinityllp.com