Why invest in Africa?
By Ewa Abel, Investment Manager, Oryx Impact
International private equity and debt investors have been cautiously eying Africa as an investment region since the first bullish publications about the continent have been produced by top consultancy firms back in 2010. Even though most of the positive predictions on economic growth, political stability, technology development and demographic growth have materialized, many investors have not been able to fully take advantage of the numerous positive trends, in part due to lack of local expertise, track record and network. With more experience and local knowledge gathered over the last decade however; an increasing number of Africa-focused funds have the skills and tools necessary to make successful investments in the region.
What is additionally attractive to an increasing number of global investors is the amount of impact that can be generated through sustainable investments in Africa, the least developed of all continents. It has become evident that aid provided to the region through donations and grants has not contributed to its development, but was only able to fulfill short-term, urgent needs caused by humanitarian crises. Global opening to trade from Africa, for example, has proven to add much more value to local economies. However given that most exports from the continent are unprocessed commodities, it has not brought about real development. What has the power to deeply transform African economies and societies is investment into value adding sectors such as manufacturing, technology, financial services, infrastructure, healthcare, education and the like, which require not only a financial input, but also knowledge sharing, resulting in development of valuable skills by local population and creation of quality, formal jobs.
The key mega trends currently driving investor interest in Africa include: the economic growth in the region; the enormous demographic expansion coupled with booming urbanization, which drive consumer spending; opening of intra-continental trade with the African Continental Free Trade Agreement; the unmet demand for growth financing of small and medium enterprises; and climate change urgency.
African economies have experienced faster growth over the past 20 years than the global average, showing much resilience to the economic crisis of 2008, despite suffering losses resulting from the Arab Spring (most affected countries include Egypt, Libya, Tunisia) and declining oil prices (most affected are the large oil exporters: Nigeria, Angola, Algeria and Gabon). Africa’s real GDP grew on average by 5.4% from 2000 to 2010, when the world average was 3%, and 3.3% between 2010 and 2015, when the world average amounted to 2.9% (McKinsey). In 2020 Africa’s GDP declined by 2,1% (African Development Bank, 2021) due to the global crisis caused by the COVID-19 pandemic. It was the first time in 25 years that African economies have on average experienced a contraction. In comparison to other key regions, the depth of the economic downturn of 2020 has not been as severe in Africa as in other continents, however the road to recovery is estimated by the IMF to be slower in the region due to lack of capacity of local governments to support their economies with fiscal stimulus. By 2022 Africa is expected to again outpace the global GDP growth average.
The continent has the advantage of a young and growing population and will soon have the fastest urbanization rate in the world. Currently there are 1.3 billion Africans living on the continent, and this number is expected to double by 2050 and then double again until 2100. The below graph compares population numbers by region between 2020, 2050 and 2100:
The median age of Africans as of 2020 stood at 19.7, whereas the second youngest continents were Latin America and Asia with a median age of 31 (38 in North America and 42 in Europe; Worldometer, CIA World Factbook). By 2034 Africa is expected to have a larger workforce than either China or India (McKinsey). With proper policies in place and well-directed investments focused on inclusive development, these trends can result in an immense demographic dividend.
Accelerating technological change is further unlocking new opportunities for consumers and businesses in Africa. Dynamic development of mobile technologies resulted in a major leap frog for many sectors in the continent, with mobile payment applications being now more popular then banking solutions across a number of African countries. This has helped solve the problem of financial exclusion of low income, unbanked population. Distributed solar power solutions are a yet another technology breakthrough helping transform the least electrified continent in the world (600 million Africans don’t have access to electricity according to the International Energy Agency). There are already a number of renown African tech companies that have reached hundreds of millions of dollars in valuations including Jumia, the continent’s flagship e-commerce company, Andela — tech education provider, or payment solutions such as Fawry, Mpesa, Interswitch or Paga. These tech success stories have been attracting Venture Capital investors who in 2020 invested US$ 1.43 bn in equity funding (a 44% decrease from 2019, mostly due to COVID-19 delaying investment processes and an increased risk aversion amid the global recession; Partech).
Another favorable trend in Africa is the increase in consumer and business spending, which amounted to US$ 4tn in 2016 and is expected to reach US$ 5.6tn by 2025 (McKinsey). Addressing this increase will require businesses to have a good understanding of local market trends and to develop sales forces able to target the local private sector. The continent will also need an increased manufacturing output to meet the growing demand. According to McKinsey, if the environment for manufacturers is improved, it could deliver up to US$ 930bn in output by 2025 (it was at US$ 500bn in 2016). This in turn could create 6–14 million stable jobs.
The manufacturing output could be further driven by increased intra-continental trade facilitated by the African Continental Free Trade Area agreement, already signed by 54 out of 55 African countries. The goal of the AfCFTA is to create a single market for goods and services, and facilitate movement of people to deepen economic integration between African states. Signatories commit, among others, to remove tariffs on 90% of goods by 2024, with the remaining 10% to be phased out over time, and to mutual recognition of standards and certifications across suppliers. According to the UN, cutting intra-African tariffs could result in US$3.6bn of welfare gains to the continent through a boost in production and cheaper goods. AfCFTA is also expected to drive economic development since intra-continental trade is mostly in manufactured goods as opposed to commodities that do not generate as much developmental value.
Yet another reason for investors to consider capital allocation to Africa is the SME financing gap estimated at US$ 331bn by the IFC. There are many microfinancing institutions providing funding in the range between US$ 100 — US$ 50k to micro and very small companies. Large corporates also have a variety of funding sources to tap into, from large global private equity funds, through banks, to local and international stock exchanges. The small and medium companies, however find it difficult to access both debt and equity. Local currency borrowing rates in Africa are very high, oscillating roughly between 10–30%, which is not only unaffordable in most cases, but also difficult to obtain due to high collateral requirements. There is also an insufficient amount of equity providers, as the size of private equity investment in Africa is dwarfed by that of any other continent and local regulations and stock exchanges aren’t sufficiently developed to cater to SMEs. Supporting private equity, private debt and venture capital funds with the right experience and skillset is hence extremely important in closing this financing gap.
Lastly, Africa is one of the key battlegrounds to combat the global climate change, which is top of the agenda to a growing group of investors. The continent is home to the “second lung” of the globe, namely the Congo Basin, the second largest rainforest after the Amazon, which absorbs a large amount of carbon dioxide and produces vast volumes of oxygen. Africa is highly vulnerable to climate change, given that the two most extensive land based projected decreases in rainfall are to occur over North Africa and South Africa (BBC). The continent is also highly dependent on agriculture, with 60% of the population of Sub-Saharan Africa being smallholder farmers, and about 23% of the region’s GDP coming from agriculture (McKinsey). Given the very low degree of climate change adaptation, local farmers are heavily reliant on conducive weather conditions.
In summary, Africa presents a strong investment case not only for its capacity to generate profits that stem from the demographic dividend, growing consumption and technology advancements, but also due to the potential economic, social and environmental development that can ensue from well-targeted, sustainable and inclusive investments in the region. There is a tremendous opportunity to generate profits from investing into well-managed African businesses, which are poised for growth in the wake of a dynamically growing population and booming urbanization that drive consumer spending. What might be even more compelling to some investors however, is how such investments can improve the lives of all Africans, eradicate poverty in the region, bring stability and resilience to local economies, provide quality employment and empower entire communities across the continent.
Ewa Abel is an Investment Manager at Oryx Impact and has been active for over 9 years in the field of Venture Capital; first as a VC investor for a Polish-Israeli fund Giza Polish Ventures and later, in the last 3 years as a VC Fund of Funds investment manager at the European Investment Fund (EIF). Ewa is based in Lagos.