By Olufemi Barbarinde, Ph.D.
Associate Professor of International Studies, Thunderbird School of Global Management


Renaissance Africa

Private equity activity in Africa is not a new phenomenon. In fact, private equity capital commitments across the continent steadily increased from over $1.3 billion in 2004 to roughly $3 billion in 2007. Approximately $2.3 billion were raised for Sub-Saharan Africa (SSA) in 2006 and in 2007, of which the Republic of South Africa (RSA) alone accounted for an estimated 80%, and Nigeria accounted for another 10% of the deals, while Angola, Botswana, Ethiopia, Ghana, Kenya, Mozambique, Senegal, and others accounted for the remainder.(1) Although the SSA private equity market is highly concentrated, and the total equity commitments in the region in recent years constituted merely 7% of funds raised for all emerging markets, it has attracted participants from within and outside the continent.(2)

In the past couple of years, for instance, Glodman Sachs and RSA-based Pamodzi, each launched $1.3 billion funds, while Actic, Ethos, Emerging Capital Partners, and Renaissance Capital, each launched roughly $1 billion funds, and HSBC Kingdom Africa, Citigroup, and Global Environmental Fund (GEF) respectively launched a $400 million, a $200 million, and a $150 million funds for Africa.(3) In addition to institutional investors, as well as international financial institutions (IFIs), African and non-African development finance institutions (DFIs), among them, the African Development Bank (AfDB), the Development Bank of Southern Africa (DBSA), the British Colonial Development Corporation (CDC), the Dutch FMO (Development Finance Company), and the French PROPARCO (Investment and Promotions Company for Economic Cooperation) have participated in private equity activities in Africa.

Notwithstanding the foregoing, however, the calamitous global financial meltdown and economic contraction that commenced in earnest in the United States and in other Western capitals sometime in 2008 has metastasized to other parts of the world, including Africa, and constitutes a potential threat to private equity activity in the continent. The financial and economic turmoil, triggered largely by reckless practices by operators in the financial sector (e.g., subprime mortgage lending debacle, intricate derivatives and credit default swaps implosions), and poor regulatory oversight, have resulted in, inter-alia, widespread balance sheet problems, bad debt write-downs, bailouts, plant/business closures, bankruptcy protections, and jobs shedding. The effects are being felt all over the world and are reverberating across the continent of Africa.

The palpable fear now is that international/institutional investors and fund managers either have begun to scale back their operations in Africa by withdrawing partially or wholly or plan to reduce their exposure in Africa. Others, however, posit that to the extent that the continent has, for quite a while, existed on the periphery of the global economy, and in view of the diminutive size of private equity activity there, relative to the rest of the world, it is unlikely that the on-going financial and economic crisis will devastate the continent as much as perhaps in other better globally integrated regions of the world.

Regardless of which thesis more accurately predicts the imminent impact of the global financial and economic crisis on the African continent, investors, fund managers, and other pertinent decision-makers may wish to consider the following as they ponder what to do with and about their operations and interest in Africa.

  1. Although with few exceptions, Africa of today is not the Africa of the 1970s through much of the 1990s. To be sure, Africa has come a long way from its checkered history and troubled past, when large swathes of the continent were embroiled in protracted civil wars, change of government was fashionably by coup d’état, and the socio-economic condition was in decay. Nowadays, and for almost a decade now, the continent seems to have turned the proverbial corner. Most African countries have replaced ascension to power by coercion with elections, that is, they have transformed their polities from one man/one party dictatorships to pluralist democracies, even if elections are not always free and fair. Under the auspices of the African Union (AU), Africans have rebuffed military coups d’état in Sao Tome & Principe (2003) and in Togo (2005), and is applying pressure on the military leaders of Guinea, the continent’s most recent military putsch. In a similar vein, for seven consecutive years now, Africa’s economy has grown by almost 6%, surpassing the average world economic growth, and average inflation is at a 10-year low.  These have been made possible by a constellation of factors, viz., the pursuit of tough economic reforms and policies (microeconomic liberalization, macroeconomic stabilization, institutional reforms, etc.) in concert with the AU’s New Partnership for Africa’s Development (NEPAD), surging commodity prices, debt write-off, ebbing conflagrations and relative political stability, strong domestic demand, and increased net capital inflows. Despite the current global economic downturn, the UN, the IMF, and others expect average economic growth in Africa to remain comparatively strong at over 4% in 2009, which would be above the global average and many regions of the world. Furthermore, rates of return on foreign investment in Africa are better than in other developing regions.(5) It is no wonder from the foregoing that the Economist revised its 2000 assessment of Africa as “the hopeless continent” to one where “There is hope” in 2008.
  2. Many African countries have in recent years reformed and deregulated their markets and thus make them more investor-friendly. Inter-alia, the telecommunications, financial, and real estate sectors are being modernized and have been opened up to foreign ownership. Furthermore, international investors do not have to worry about subprime lending facilities, credit default swaps, and other cute derivative instruments in Africa, because of its fairly simple financial systems.
  3. In spite of the current and forecasted global financial and economic downturn to which Africa is not immune, innumerable opportunities for the development of infrastructure still abound in the continent. The fact remains that Africa, particularly, SSA, continues to suffer from the paucity of basic myriad amenities. Electricity, telephone services, tarred road/highway networks, piped-borne water, are a few of basic amenities that are in limited and unreliable supply across Africa. Thus, private equity investment opportunities exist for projects, such as water bottling, supermarkets, agro-processing, IT, mobile telecoms, and logistics, partly because of an emerging consumer/middle class that is better connected to the global economy and longs for globally recognized brands, and partly because countries are undertaking steps to improve the standards of living of their populations. Indeed, Africa’s misfortunes and challenges constitute opportunities for private equity entities.
  4. To that end, the AfDB and the DBSA, inter-alia, continue to approve trans-African private equity investments in infrastructure, thereby making the two DFIs potential partners for international investors.(6) Moreover, the pan-African scope of the projects addresses economies of scale concerns of would-be investors.
  5. Given that there is always a modicum of risk in any investment undertaking, exit remains a challenge in Africa for private equity investments. Initial public offerings (IPOs), typically employed in the West and in other BEMs as exits, are limited in Africa. However, there is still room for IPOs in the continent, especially as countries further liberalize their markets and unbundle partially/wholly owned parastatals, which could be employed as safe exit routes. It may be comforting to know that though small in volume by global standards, some IPOs have been oversubscribed in Africa, and stocks have performed relatively well in the continent. Whereas stock prices fell in many of Africa’s stock exchanges in 2008 due to the global economic condition, the losses were not as steep when compared to stock performances in other parts of the world. Besides, the decline in stock prices could mean an opportune time to buy, particularly for those hoping to diversify their portfolios. Moreover, despite the gloom and doom forecasts and layoffs that are being announced by major Western companies, their operations in Africa seem to be doing very well.(7)
  6. At the risk of emphasizing the obvious, international investors should eschew the age-old habit of treating African countries as a monolith, because they are at different levels of development, and the degree of financial integration varies across the continent. Some of the African countries that are regarded as frontier emerging markets or frontier economies include Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda, and Zambia.(8) Others include Algeria, Egypt, Mauritius, Morocco, the RSA, Senegal, and Tunisia. These are countries that have, inter-alia, strengthened their financial institutions with good oversight, and some have even sold treasury notes in the local currency to international investors. In short, international investors have to be selective.

1 - African Venture Capital Association, 2007 and OECD Policy Insights, No. 55 & No. 60
2 - For example, Celtel, Africa’s third-largest mobile provider was acquired by a Kuwaiti group for $3.4 billion in 2006.
3 - Data were obtained from presentations to Thunderbird’s Winterim in South Africa in January 2009, and partially substantiated by OECD Policy Insights, No. 55 & No. 6.
4 - “Right Time for Africa,” by Adoulaye Bio-Tchane and Benedicte Vibe Christensen, Finance & Development, December 2006, Vol. 43, No. 4, and World Development Indicators, The World Bank, various years.
5 - United Nations Conference on Trade and Development, 2008
6 - AfDB Private Sector Obtains Approval for a US$ 30 million Equity Investment in the African Energy Infrastructure Fund
7 - For example, whereas the US government has bailed out and injected much-needed capital to both AIG and Citigroup, a November 2008 media release, noted that AIG’s profit in the RSA increased by 63% in the third quarter of 2008, compared to the same period in 2007, and by 39% for the first three quarters of 2008, while for Citigroup “2008 was its best year in Africa.”
8 - “The Rise of Africa’s “Frontier” Markets,” by David Nello, Finance & Development, September 2008, Vol. 45, No. 3.

About the Author

Olufemi Barbarinde, Ph.D.

OLUFEMI BARBARINDE, Ph.D.
Associate Professor of International Studies, Thunderbird School of Global Management

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