The advantages of investing in Africa
10 July 2013
The need for widespread access to electricity in Africa presents a big opportunity to investors - will they follow Obama's example? Marie-France Mathes, managing director and head of Investor Relations at Emerging Capital Partners takes a look.
"The few candles of hope are flickering weakly", ran The Economist's "Hopeless Continent" cover story editorial on Africa at the turn of the millennium. Although times and opinions have certainly changed - over the last decade - real income per person across the continent has increased by more than a third, for instance - the light metaphor remains apt.
President Obama's state visit to some of the African countries this month launched "Power Africa", a bid to "bring light where there is darkness", as Obama put it.The African Development Bank estimates only 42% of people in Africa have access to electricity. The effects of this power shortage are numerous, hitting businesses looking to compete on a global scale, and hitting health care facilities and quality education services.
To close the gap, the World Bank estimates a need of $93 billion (€72.2 billion) in annual investment in Africa's infrastructure over a period of 10 years - half of which is required for power supply.Even with Obama's pledge from the US government to increase access to electricity in Africa over the next five years, there is still a clear gap remaining if demand is to be met. As every investor knows, where there is demand, there is opportunity.
Take for example Ciprel, a power generation company based in Côte d'Ivoire, which provides 30% of the energy consumed by the country. Ciprel is growing out its existing natural gas-fired power plant, which includes increasing capacity on its steam plant and retrofitting two gas turbines.The project is expected to enhance the efficiency of the power plant by generating about 25% more power, without the use of any additional gas. It is backed by private equity capital.
Private equity investment in Africa - which has traditionally attracted the funding of the development finance institutions - is increasingly becoming of interest to institutional investors such as local and international pension funds, sovereign wealth funds, fund of funds and also family offices. More and more, they appreciate the opportunity for strong financial returns posed by the continent.
As the IMF's latest regional outlook noted, "Sub-Saharan Africa is now the second fastest growing region in the world, trailing only emerging Asia... The near-term outlook for the region is broadly positive because most factors lending support to economic activity in the last few years remain in place - namely strong investment, favorable commodity prices, and generally prudent macroeconomic management".
The trend towards increased investor interest in Africa is marked; the Emerging Markets Private Equity Association's latest survey of institutional investors reveals that Sub-Saharan Africa is poised to see the greatest increase in new private equity commitments across the emerging markets over the next two years, edging out Brazil, China and India as the most attractive destinations for deal-making.
Among ECP's portfolio, examples can be found of family offices seeking an occasion to be a part of the Africa opportunity: African telecommunications towers company IHS recently secured a $125 million investment from European Family Office Wendel- its first direct investment in Africa.Moreover, private equity is a way to access Africa's appealing growth while stock markets (ex-South Africa) are often illiquid and unrepresentative of the economy. It can also offer more disciplined valuation, less volatility and greater management control - all especially important in developing markets.
What is more, President Obama's Power Africa speech is a perfect example of how we can deepen our understanding of the African opportunity. His vision is disarmingly simple but no less powerful for being so: Support private investment into Africa, which not only makes money but also makes the world a better place.
The mood is changing in how investors think about risk, return and rewards, and investors are increasingly aware that they don't need to give up their values in order to make a profit.