Political and currency risk overshadow all other concerns likely to deter LPs from investing in sub-Saharan Africa in the near future, according to an Emerging Markets Private Equity Association global survey. Yet still, Africa is home to the largest working age population and is one of the fastest growing regions in the world. This presents significant questions for LPs and GPs when considering how to approach the Continent.
For a perspective on how the entire African region is likely to perform in the year ahead we asked Runa Alam, chief executive of pan-African manager Development Partners International (DPI) – which has just finished investing African Development Partners II, a 2013 vintage $725 million vehicle – for her take.
From your vantage point, what are the key issues for investors in Africa?
RA: Investors are concerned about what is happening in Africa in the context of emerging markets generally. Their primary fear is the end of quantitative easing in the US, the beginnings of that in Europe and restricted money supply. A lot of money that had gone into emerging markets, including Africa, has retreated and people are worried it is a trend that will continue. They are also worried about volatility. In the US there has been a very long nine-year bull run.
In emerging markets, however, there have been ups and downs. So, there is fear of contagion, macroeconomic problems and currency declines. As we enter 2019, there is no way to avoid having these discussions, however, for the astute and considered investor, such volatility and challenges can conversely present unique opportunities.
Within that context, how is LP appetite for Africa?
RA: African markets are less correlated with the US than Asian markets, which means they offer more diversification as well as hedging opportunities. LP interest is very specialised. It has increased over the years but is still growing slowly. It depends on the circumstances of the LP, what their emerging market allocation looks like, if they have already invested, or whether they decided to skip other emerging markets because they are late to those and still see plenty of early move opportunities in Africa. It also depends on the size of the LP, so there isn’t a single overriding trend.
How does the macro situation compare with other emerging markets?
RA: Africa is different from other emerging markets; as a GP we have already dealt with what GPs in other emerging markets are beginning to face now. Currency declines across the continent happened a few years ago with some dropping as much as 80-90 percent. The only region spared was Francophone Africa, which is pegged to the euro. It remains one of the fastest growing regions in the world, with certain countries like Côte D’Ivoire and Senegal growing six percent or more each year.
Today, excluding South Africa and for varying reasons Tunisia, there is very little in the way of currency volatility. In Morocco, the currency has remained pretty much flat. In Algeria it’s down about three percent, which is less than the dollar, and in Nigeria it is also flat. Egypt is down one percent or so. South Africa has seen a more significant drop because it’s a larger economy with a big stock exchange and more exposure to other emerging markets.
How do you protect your hard work and the value of your portfolio from currency devaluation?
RA: Our investment strategy focuses on the emerging middle class and increasing urbanisation. Between 2015-17, overall consumption, in addition to the number of people entering the middle class, continued to rise. Looking at our own companies – take our branded, generic pharmaceutical business as an example – they all continued to sell thanks to the unmet demand for their products and their broad base of customers.
Many of our companies used the crisis to take market share. Several changed their supply chain from being largely import based to now predominantly local, allowing them to reduce their dependency on foreign currency and offer reasonable pricing to the local consumer. They did well during that time, and growth was able to outpace FX declines.
Looking ahead, what do you expect to see?
RA: Next year should be a good one in terms of investment opportunities. If you’re a dollar investor like us, you’re investing on the back of a strong dollar. Prices have been low on African stock markets over the past few years and haven’t fully recovered, and so continue to look very reasonable. Additionally, the level of competition in African private equity is quite low compared to other parts of the world.
Are there particular areas – countries or sectors – where you see the strongest pipeline of opportunities?
RA: Frankly, for the first time in a while we are seeing opportunities all over for a number of different reasons. In Francophone Africa, companies are still looking for financing and it is a good place to consider investing, particularly in banks and financial institutions as well as consumer facing industries, like education and FMCG, which reflect the positive macro situation. Nigeria and most of sub-Saharan Africa, but also Egypt, have seen macro issues and FX declines but are now seeing currency levels that make sense in comparison to the rest of the world. After a few years of negativity, sentiment in the investment environment is increasingly more positive.
Are fintech, digitisation and e-commerce a theme?
RA: Companies are developing new technologies that will give them greater access to the online marketplace. Some is proprietary or specifically adapted for Africa, however, it remains at an early stage. The safest investments are still in established industries such as home goods and electronics, processed foods and pharmaceuticals. There is high growth and there exists a history of companies that have done well in those spaces. Many GPs have introduced dedicated fintech teams, and, operationally, sought opportunities where they could drive an increase in online sales and improve warehouse efficiency through the implementation of technology. Within our own group of companies, management’s most frequent request relates to the integration of technology; whether in building a bigger online sales platform or assisting with cybersecurity, etc.
What’s the pace of dealflow?
RA: The dealflow has been extraordinary. In part, it reflects the emergence of economies from a situation in which companies were seeking finance but money supply was previously restricted. Now, the GPs that have the money are seeing a very strong stream of opportunities at very reasonable prices and this is across sectors. One trend to note, is that 25 years ago, regional economic activity was predominantly government led. That has changed significantly. Today, the private sector represents the biggest segment in many African countries.
Geographically, do you see any particularly promising new markets?
RA: Absolutely. Ethiopia has the second largest population in Africa and is opening up slowly. Angola is also a large country, that is well endowed with natural resources. Similarly, Zimbabwe has a pool of natural resources, as well as a very solid business culture. As these countries continue to evolve and change over time, they are definitely worth keeping an eye on.
As you look across Africa, even markets that we have invested in for a long time are beginning to look even more interesting. Nigeria is one example of this, and we are also continuing to invest in Morocco and Egypt. Additionally, Kenya, Uganda, and Tanzania, and all of the SADC (South African Development Community), including South Africa, offer lots of interesting areas to invest in, even more so than three or four years ago.
In East Africa specifically, we see attractive growth underpins for the consumer, healthcare and broadband-enabled technology sectors in Kenya. In Uganda we see attractive dynamics in the consumer, healthcare and financial services sectors. The fundamental thing that these markets share is that they are fairly big economies although the industries you invest in are specific to each.
Are you seeing African markets becoming more integrated in terms of infrastructure, communications and trade?
RA: Very much so. The McKinsey terms ‘African Lions’ and ‘Asian Tigers’, explains a lot. The tiger economies were defined by their export agreements and international interest in the highly technical products they developed. The African Lion economies are better known for their national trade and relationships with countries across Africa. In recent years, as the African economies have continued to grow, we are now beginning to see companies outgrow their home economies, and initiate international trade agreements.