Investing in Africa…The Dark and Lovely

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(An opinion on harnessing opportunities in Africa, based on risk and reward considerations)

“Be fearful when others are greedy, and be greedy where others are fearful.”

This quote by renowned billionaire investor and philanthropist, Warren Buffett, perhaps best describes the current prospects of the African economy. The once troubled continent, previously beset by endemic socio-economic plagues which hindered prospects from tapping into the continent’s inherent potentials, is now the beautiful bride of the world.

To its suitors, however, the question remains, “is this beauty only skin-deep?”

Although the attractiveness of Africa for business and investment has significantly improved over the last decade, leading to increased foreign investment; the decision on where and what to invest in is still a major challenge to the foreign investor. Ironically, the support and partnership of this richer, more advanced, foreign investor world, is key to harnessing the potentials of this land.

According to Ajen Sita, Africa Managing Partner at Ernst & Young, in their report Africa by Numbers: Assessing Market Attractiveness in Africa (November 2012), “the sheer size of the continent can prove daunting for many investors as well as the different sets of rules, regulations, stakeholders and market dynamics that exist across the 54 countries. There is no (one standard) template for doing business in and across Africa”. Also, Michael Lalor, Lead Partner, Africa Business Center at the same institution said, “While much more could be done to market the progress and improvements that have been made in many parts of Africa over the course of the past decade effectively, there are concrete issues and challenges that should be addressed, not only to increase the overall investment attractiveness of African economies, but also to ensure that host African countries derive maximum benefit from these investments.”

For the investor considering a move for Africa, here are 3 things to note:

1. The First Mover is not always at an advantage

Although the first mover often stands to reap a larger share of reward for any new venture (because first mover risk is greater anyway), in an untested market, the first mover is not always at an advantage because a learning curve may exist in effectively establishing new models, products and services.

In Nigeria, the new power sector reform is showing this.

Many of the investors who bid for the power generation assets of the government are beginning to turn around, asking for further concessions on various parameters of the reforms. Many simply did not have full knowledge of the industry and simply engaged the opportunity, due to the promise around it. Many foreign investors might be dragged in, with unmeasured exposure to that sector.

Reasonable care cannot be over emphasized

2. The Challenge has Shifted

For many foreign investors, their perceptions of political instability, corruption and other governance-related issues hinder their ability to really partake in the attractive return potentials. This perception should be reconsidered.

While it is important to evaluate sovereign and political risks adequately, the challenge to doing business in Africa is moving away from public sector inefficiencies. Key success factors for foreign investment into projects and businesses are largely based on the subject of investments themselves. Various private corporations and businesses are innovatively dealing with issues in the market and thriving; able to post decent returns to their investors.

This is increasing the size of the quadrant of “low risk, high return” opportunities, which discerning investors are tapping into, especially in mid-to-micro scale, emerging sectors.

3.     Use a Tourist Guide

A good way to approach the African opportunity is to do so by partnering with local advisors.

According to Thomas C. Barry, President and CEO of Zephyr Management LP, a New York based firm that has profitably engaged Nigerian market since 1997, “there is good merit in working with local experts”.

It is just like engaging a tourist guide, when vacationing in a new country. Not that you won’t get to where you want to go without him, but with him, you will get there quicker and more efficiently.

Local investment banks and advisory service firms in Africa play an important role. They know the terrain and can easily provide effective mitigating factors to various risks.

Africa brings a wealth of opportunities, natural resources, a booming middle class with rapidly increasing spending power, and a growing population that makes just about any product or service a potential game changer.  Armed with the right skills and expertise, investors stand to gain significant returns from investing in African markets.

In the words of our opening quote, it is time to “….be greedy where others are fearful.”

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