Investing in Unfamiliar Territory

Nearly every African stock market index outperformed the S&P 500 over the past three years in U.S. dollar terms—in most cases by a significant margin. A sampling of overall equity market returns in 2006: Botswana +34%, Cote d’Ivoire +17.7%, Ghana +109%, Kenya +18%. (Source: Barron’s

According to the World Bank, sub-Saharan Africa’s economic performance over the past five years suggests that it may have achieved a milestone in its quest for sustained growth. Growth averaged 4.0% between 2000 and 2005, compared with less than 1% during the early 1990s. In 2006, GDP expanded by 5.6% in sub-Saharan Africa and is projected to climb to 5.8% through 2008. The Congressional Research Service reports that “the growth seen in the current period is less volatile and more evenly distributed among African countries than in the past.” Yet over half of the $19.6 billion total U.S. investment in this region is in the petroleum sector. Reuters reports that the U.S. is so far behind that it had little presence at a recent meeting of the mobile phone industry group, the GSM Association, to discuss a $50 billion investment in sub-Saharan Africa in the next five years. Many such non-extractive sectors are nearing a tipping point, ready for investment.

Reuters reports that major U.S. companies watching Africa’s rapidly improving investment climate will be examining ways to increase their activity. Merck & Co, Boeing Co, 3M Co, Cargill, General Motors, Chrysler, Hewlett-Packard and Coca-Cola were among the participants in the 2007 U.S. Africa Business Summit.

Brisk demand for the commodities that comprise traditional large-scale foreign investment in Africa—oil, mining, agriculture—is creating secondary opportunities in consumer markets. Banking, telecommunications and tourism are among the sectors receiving a boost; renewable energy has the potential to leapfrog infrastructure obstacles the same way mobile phones have done. (Source: MoneyWeek, Investec Asset Management)

“I think there is a lack of information about the quality of opportunities and potential that continues to exist in Africa within the American business community.” (Robert Mosbacher, President of the U.S. Overseas Private Investment Corporation, speaking to Reuters). Renew aims to bridge those gaps by conducting comprehensive business assessments tailored to the needs of U.S. investors.

Experience suggests that fund managers are leery of Africa for two primary reasons: 1) Markets are comparatively very small; 2) Investments are illiquid—it’s too difficult to exit. In their 2007 analysis of African capital markets, experts from the Center for Global Development chart the following path forward:“A long-term strategy for attracting equity investment should concentrate on increasing the supply of available securities—since demand will come naturally through the market. Increasing supply means tackling the barriers of small market and firm size to encourage the growth of more and larger firms on the continent. Solutions to increasing the size and scope of the African private sector must focus on improving the investment climate, reducing the level of risk and uncertainty, and providing greater means for small, indigenous firms to survive and grow.”RENEW mitigates risk, channels needed resources and provides the expertise that will enable promising firms to grow and compete globally.

“Many ideas that have been tested in the developed world, like cell phones, are still novel in Africa. Good business ideas and capable management are [the elements] in short supply. Most institutional investors are still frustrated by the quality of the deals available.” At the same time, few market sectors are saturated with products or teeming with competition, leaving plenty of niches for new ventures. As a result, “differentiated products can command a significant premium.” (Kehinde Oyeleke, executive director of Asset & Resource Management, interviewed by Knowledge@Wharton).

Local versions of Apple’s Steve Jobs are changing the playing field throughout Africa by creating enterprises that drive progress. Adenike Ogunlesi built a winning clothing brand by mixing African fabrics with Western styles and fabrics. She’s grown her business to the point where her company, Ruff ‘n’ Tumble, is not only a leader in Nigeria but receives orders from WalMart as well. Ogunlesi managed to scrape together enough capital from friends and family; others like her need access to better options. (Source: Africa Open For Business).

Paul Kagame — President of Rwanda and winner of the 2006 and 2007 ICT Africa Award for his innovative use of information and communications technology—has earned the nickname “The Entrepreneur President” for his business and technology-driven plan for Rwanda. Ngozi Okonjo-Iweala, the former Finance Minister of Nigeria and currently a director at the World Bank, emphasizes reform, economic growth and business opportunity. “The best way to serve Africa today is to help Africans stand on their own two feet, to create jobs,” she says. Imagine if Africans did not depend on others to cure their diseases or educate their children. Jobs enable Africans to do these things for themselves. (Source: Forbes, TED Conference)

Since 2000, more than two-thirds of African countries have had multiparty democratic elections. In the past three years, the average rate of growth on the continent has moved from 2.5% to 5%, better than many of the wealthiest OECD countries. Conflicts in Africa are down from an average of 12 per year a decade ago to three per year today. (Source: World Bank, TED Conference)