Democracy, corruption and explosive growth

Actis’s head of Africa tells about the challenges facing the continent and its pending growth story.

Peter Schmid, head of Africa for emerging markets private equity giant Actis, is looking at the bigger picture.

“There are a couple of macro-economic factors that make Africa particularly interesting,” he says. One of these is the simple fact that Africa’s population, which stands at around 950 million today, represents around 12 percent of the globe’s inhabitants. By 2050 this is expected to reach 2 billion.

Nigeria could overtake South Africa fairly quickly as the leading economic powerhouse. 

“If you compare Africa to India, for example, there is not a huge difference in population, and yet India is seen as the hot continent in terms of private equity,” he says.
 
The other significant macro driver Schmid points to is the continent’s growing consumer class: “You have more people than ever before being lifted out of poverty daily to join an emerging middle class.  This combined with people and capital flows from the African Diaspora back to the Continent, creates great investment opportunities,” says Schmid: “If you have a position on the ground in any of these markets – in particular the bigger ones like Nigeria, Egypt or South Africa – you find enormous demand for goods and services.
 

Peter Schmid

“Right now many of these products are either unavailable or are being provided at a very high cost by informal traders at inflated prices. Long standing South African businesses that have moved into other African markets, such as MTN or ShopRite, have found themselves within a couple of years since expansion, making more money outside of South Africa than inside it.
 
“Limited competition and supply make for substantially higher margins”, he continues. Even in oil-heavy markets, Schmid contends that the lion’s share of the growth has been driven by the rise in consumerism. “The growth rate in some of these countries has been close to double digits. In the likes of Nigeria, where oil growth has in fact been quite stagnant, the growth has been in sectors like financial services, consumer services, telecoms, agriculture. These are the sort of sectors which have really exploded in the last few years, and this is where we have been investing: not in the resources sector.”
 
Risk factor
 
For all the positives, however, concerns about governance still prove to be a hurdle for many potential investors in African private equity. What Schmid describes as “sovereign risk” needs to be better understood by institutional investors. “When I travel around the US and Europe raising capital for African private equity, sovereign risk is one of the big concerns that investors have,” he says, “But if you look at what has happened in the last few years – and this is something that people don’t always realise – democracy has really expanded. Now in Africa most leaders have been democratically elected.”
 
Schmid qualifies this thought by pointing out that large question marks hang over the credibility of some election processes, but regimes like Sudan, Zimbabwe and Somalia are “very much in the minority”, he says. “The fundamental difference now is that we actually have elections.”
 
One risk that continues to bedevil Africa is that of corruption. Despite steps in the right direction, more needs to be done to counter corrupt behaviour. “Young people in the more corrupt countries have to stop considering politics as a quicker route to wealth than hard work,” he says.
 
It is widely recognised that the sudden discovery of significant oil & mineral resources can be a curse as well as a blessing. Examples of this have been seen in Latin America and Africa. In Africa we still have differing examples of how well these resources have been managed.  We need more of the ‘Botswanas’ than the others.”
 
Action in the last year, however, has gone some way to making corruption less prevalent. “Take Nigeria for example,” says Schmid. “What is happening in the US and Europe now – as well as the internal processes Nigeria has installed – has cleaned the situation up a lot. More and more people are realising you can do business in Africa without being corrupt. Actis has been fastidious about this and has shown you can operate without paying bribes.”
 
One of the most effective solutions to the corruption problem, according to Schmid, will be the influence wielded by the increasingly mobile and well-resourced middle class. “People are becoming less tolerant of it,” he says. “The consumers themselves are part of the long-term solution; the more you grow the middle class, the less tolerant they will be of corruption.”
 
Talent pool
 
Another challenge facing African private equity and the business world in general is what Schmid describes as “human capital risk”. It is still difficult to attract and retain world-class candidates to lead Africa’s various corporations and enterprises – a vital element in propelling African growth to the next level. “Whenever we encounter problems,” says Schmid, “it is down to the problem of attracting management.”
 
Will the financial crisis bring talented Africans back, as economies elsewhere in the world suffer? “It’s something we have seen on a small scale,” answers Schmid, “but it is more a case of stopping the exodus rather than drawing people back. The truth of the matter is that many good people are being retained by the overseas institutions who want to maintain or increase their emerging markets exposure.”
 
The real key to unleashing Africa’s economic potential, according to Schmid, is infrastructure. He points to Nigeria again as a case in point. If the government could boost its infrastructure spend, address power grid problems, refurbish ports and fix the road and rail networks, Schmid predicts a growth explosion: “The 150 million people there would become an engine for African growth. It could overtake South Africa fairly quickly as the leading economic powerhouse on the continent.”
 
Within these economies, buying opportunities are plentiful, says Schmid: “The reason that private equity is so attractive is that you can buy a market-leading company – which may have no competitors – at half the entry EBITDA multiple that you would pay in China or India.”
 
The overriding thought Schmid imparts is that “the arrow is always pointing upwards”. He says: “Africa is making steady progress on all fronts, whether it’s democracy, infrastructure, human capital or the growing private sector.”