Fortune Favours the Informed:
The African Paradox
Authors Andrew Snead - Managing Partner - firstname.lastname@example.org Monica Moldovan - Principal - email@example.com Maxime Bayen - Senior Research Analyst - firstname.lastname@example.org
• Africa is unquestionably a continent of opportunity – its sheer size, rapid economic growth, expanding middle class and steadily improving governance indicators provide reason for optimism • Many investors however have yet to subscribe to this ‘golden age’ notion. One plausible explanation for such a disconnect lies in the perception gap influencing investment in Africa • TMT (telecommunications, media and technology) lies at the very core of the African opportunity. Mobile services have material growth potential, underserved demand for Internet services is higher than in peer markets and the level of infrastructure-related investment amounted to more than $60 billion in the last five years • The reality is there is significant investment opportunity in TMT emanating from prevailing market imbalances, attractive multiples relative to other emerging markets, deal fallouts, and the opportunity to exploit infrastructure sharing and ecosystem plays originating from the reluctance of operators and governments alike to adjust their business models • This situation presents significant opportunity for knowledgeable investors who are able to get under the skin of the continent, disentangle the characteristics of the market and ultimately exploit the limited competition
There is an old fable concerning a shoe salesman who visits Africa but decides there can’t be a market because no one wears shoes. That individual is followed by a second salesman, who deduces that Africa must be a wonderful market because there are so many people who need shoes. The story effectively summarises Africa’s paradox: a continent of plentiful opportunities yet plagued by perceptions rooted in the past, the fragility of the present and fickle sentiment towards the future. In reality, while challenges do remain, Africa presents an undeniable value-creation opportunity for investors who are able to get under the skin of the continent, truly understand specific markets and their characteristics and ultimately separate the wheat from the chaff. The logical corollary is that risk and value destruction lie in wait for investors incapable of disentangling the continent and the market forces that define it. Many of the opportunities in Africa relate to its sheer breadth; a continent of more than 1 billion people, home to 52 cities housing in excess of 1 million people (same as Europe), and a middle class exceeding 350 million. According to the World Bank, most of Africa will be classed as middle income by 2025 if prevailing economic growth rates are sustained. The last 10 years has seen the emergence of the so-called African Lions – six countries ranked among the top 10 fastest growing economies worldwide. The United Nations suggests that Nigeria may surpass the United States by 2055 as the world’s third most populous country after China and India if current population growth rates continue unabated. Some suggest such claims are inflated and ignore some pertinent fundamentals: many Africans remain very poor, the Arab Spring and recent unrest in Malawi, Senegal and Uganda (among others) have done little to allay fears surrounding ongoing political stability and concerns remain regarding capital market illiquidity, exchange rate fluctuations, fully-functioning multiparty democracy and corporate transparency. Observing the investment landscape in Africa, it is clear that many investors have yet to subscribe to the “golden age” notion. Total PE funds raised for investment in sub-Saharan Africa between 2008 and H1 20121 fall short of those raised for Brazil alone over the same period. About 45 private equity deals were concluded in sub-Saharan...