Mapping the hotspots of Africa

Investors will give many reasons why they have yet to invest in Africa. Political and social risk, an under-developed infrastructure, the relative lack of experienced management firms and the absence of data are among those frequently cited. One social enterprise, African Rainbow Consulting, is looking to combat the latter of these issues. Its newly launched index, the Star of Africa, ranks each of Africa's 53 countries in terms of investment potential.

“There is very little summarised information on Africa that compares countries against countries,” says Katharine Pulvermacher, chief executive of African Rainbow Consulting.

The index ranks each country based on five criteria, hence the “star” moniker. These are governance, water, electricity, communications infrastructure and social capital. Governance refers to political stability, corruption levels and the ease of doing business, while social capital is a combined measure of demographics, education and healthcare.

By highlighting areas of opportunity, African Rainbow hopes to mitigate some of the risks that deter a lot of private capital from the continent, and to accelerate Africa's development. “The example of the massive growth experienced in the telecoms sector shows that some investors could be missing a trick,” says Pulvermacher. “The philosophy of business is that you create wealth by doing exactly that, and public money has largely failed in doing it.”

According to the index, Nigeria tops the list. Despite its poor governance score, the country offers significant scope for improving access to water, electricity and communications infrastructure. Ethiopia is second based on its potential for better access to water and electricity.

While the attempt to create better visibility of the African investment landscape will probably be welcomed by all those with a commercial interest in the continent, a word of warning is offered by some market participants. Roger Witcomb is a director at infrastructure development organisation Infraco: “Anything that provides more information is good, but the fact that a country has no electricity is in itself is not an indicator that you can profitably invest there: what is critically important is the investment climate.”

The African Energy Infrastructure Fund, a joint venture between investment manager Prescient and financial advisory firm Fieldstone Africa, has reached $54 million in commitments. The fund is targeting a first close on around $100 million towards the middle of the year and has an eventual target of $500 million. The fund, which will focus on Sub-Saharan African energy infrastructure projects, has received a $30 million equity commitment from the African Development Bank.

Limited partners still consider Sub-Saharan Africa to be an attractive private equity destination, despite believing that the region has become increasingly risky. According to the latest edition of the Emerging Markets Private Equity Survey, produced by secondaries firm Coller Capital and the Emerging Markets Private Equity Association, 16 percent of LPs intend to either increase their exposure to the region (excluding South Africa) or begin investing during the next 24 months. Only 5 percent of the LPs surveyed said they would decrease their investment. However, respondents said the perceived risk premium compared to developed markets private equity had increased from 6.7 to 8.4 percent in the last year.

Africa-focused private equity firm Emerging Capital Partners (ECP) has completed its largest-ever financial services acquisition, taking a stake of around 25 percent in the Nouvelle Societé Interafricaine d'Assurance Participations (NSIA) for $47.7 million. NSIA is headquartered in C^te d'Ivoire and has operations across six West African countries. Tom Gibian, chief executive of ECP, said regulatory reform in many African countries would pave the way for rapid growth in the financial services sector.

Dakar-headquartered Advanced Finance Investment Group (AFIG) has secured a $15 million commitment from UK government-backed fund of funds CDC Group for its maiden private equity vehicle, the Atlantic Coast Regional Fund. The fund, which has a target size of $150 million, will make expansion and growth capital investments in Nigeria, Senegal, C^te d'Ivoire, Ghana, Cameroon, Gabon, the Democratic Republic of Congo and Angola. It held a first close on $72 million in July 2008 and intends to hold a second later this year.

Anubha Shrivastava, managing director at UK government-owned fund of funds CDC Group, threw her weight behind the African investment opportunity at PEI Media's Emerging Markets Private Equity Forum in New York in late March. “Sub-Saharan African economies have benefited from major reforms implemented last year,” she told delegates. “While infrastructure issues lead to a higher cost of doing business, sectors such as local banking and telecommunications are in their infancy, and with vast untapped consumer demand across the region there is still strong potential for growth.”


Nigeria top investment destination despite governance weaknesses
Country Overall Governance Social Electricity Water ITC
ranking ranking capital ranking ranking ranking
Nigeria 1 42 44 1 1 1
Ethiopia 2 36 40 2 2 4
South Africa 3 4 3 10 13 12
Mauritius 4 2 4 51 52 11
Tanzania 5 17 12 4 10 15