Dispelling the African private equity myth

Political risk was on stark display in Africa this year, potentially overshadowing investment opportunities in countries in need of investment capital, writes Hisham El-Khazindar.

Over the past 10 years, an increasing number of people have become interested in the African investment story. While there has undoubtedly been a sense that “only the bravest dip their toe,” as the Eurozone crisis rumbles on and both the global economy and perceptions of risk redefine themselves, we are seeing more investors diving in.

For Citadel Capital, which focuses on the Middle East and Africa with $ 9 billion in investments under control, this growing interest is unsurprising. We have long been excited by the opportunities on offer in our home continent.

Our experience in the region has taught us that the reality of doing business here is understood by few. Misperceptions and misconceptions are pervasive even among normally savvy global investors. The two most serious of these are the idea that the continent is unacceptably risky and that the only real way to achieve a good return is by investing in commodities.

Let us first take the issue of risk and the commonly held view that Africa is an appropriate investment destination only for those willing to gamble much for the promise of outsized returns.

I would argue that given the volatility and uncertainty inherent in the global economy — including developed markets such as Greece, Spain and Italy, let alone other emerging market regions — Africa is, in fact, a sensible bet. The continent’s perceived, uncorrelated risks, when put into context, are much less daunting than commonly perceived. Yes, many African countries have had a fairly tumultuous time politically, such as Egypt and Libya this past year. However, let us not forget that despite short-term disruptions, the long term fundamentals of this region remain strong. More importantly, democracy is good for business. For the doubters amongst us, see Rwanda for reference: That country has seen its World Bank “Ease of Doing Business” ranking climb from 158 in 2007 to 50 in 2011.

Hisham El-
Khazindar

Anywhere one invests, risk mitigation is key, of course. One straightforward yet crucial step to mitigate risk in Africa is the acquisition of local knowledge and insight. Partnering with a firm that is on the ground, that offers a depth and breadth of relationships, and that is able to identify appropriate opportunities and navigate the environment should be high on any potential investor’s list. Indeed, Citadel Capital has already seen this demand from some of the world’s leading Development Finance Institutions (DFIs) including the European Investment Bank and the International Finance Corporation and many others through our funds and specific co-investments such as Rift Valley Railways of Kenya and Uganda.

Another myth of the Africa investment story is the view that the region is purely a commodities play.

It is true that Africa has an enormous concentration of underdeveloped natural resources, and that these form a key part of its attractive fundamentals. However, commodities — whether energy, minerals or agriculture — aren’t the only opportunities inherent in Africa. Africa is about consumers, it is about high-impact infrastructure investing and it is certainly about value-added exports and not just commodity exports.

The continent has a population of more than 1 billion, more than half of whom are under the age of 25, and 60 percent of whom are beginning the seismic shift from rural subsistence agriculture to urban employment. These young people represent a sizeable potential workforce for value-added products — about 1.3 billion strong by 2040 vs. 582 million today — as well as an impressive consumer market. Demands we can expect from this consumer market will range from transportation to fast-moving consumer goods, and infrastructure to support everything in between.

While the case for Africa is strong, that isn’t to say the region is not without challenges and any potential investor needs to possess patience above all else. The returns are there to be had. Easily highlighted by the fact that since 2004, Citadel Capital has so far generated more than $2.2 billion in cash returns for its co-investors and shareholders on investments of $650 million. However, these impressive returns are often accompanied by a longer holding period and narrower exit windows.

As we look towards 2012, we’re excited about the opportunities available. With our war chest suitably strengthened we’re looking forward to capitalising on our platform company positions in infrastructure, clean-technology and agriculture.

Africa’s star is rising. It’s about time.

Hisham El-Khazindar is managing director and co-founder of Citadel Capital.