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There is a lot of talk about the great “African Growth Story”, but talk is one thing, when it comes to actually participating, the road map is not so clear. As an investor interested in entering Africa, and benefitting from the opportunities that exist within the fast-growing continent, there are quite limited options.
As a first port of call, investors often turn to public financial markets as a means of investing in a region of their choice. This would entail purchasing shares of a public company listed on a regional stock exchange, or similarly, purchasing debt instruments (bonds, notes etc.) of companies which are covered extensively by the likes of well-known credit rating agencies, such as Moody’s or Fitch.
In order to be publicly listed on accredited exchanges, such as the Johannesburg Stock Exchange (JSE), companies undergo detailed scrutiny and are required to meet rigorous standards of compliance. This means that investing via such public securities gives you the oversight of a financial regulator and other compliance authorities which monitor and regulate the companies in which you are invested, or going to in invest with.
Another major advantage is that, in heavily traded markets such as South Africa, your investment can be very liquid – that is, you can trade in and out of it very quickly. You also have the benefit of a wide variety of choice when it comes to the type of company (tech, retail, resources, healthcare etc) you wish to gain exposure to. For example, the JSE, as of July 2013, has 472 companies listed. That’s a lot of choice.
Unfortunately, apart from the JSE, Africa’s financial markets are currently highly under-developed. A result of this, as the Omidyar Network’s Accelerating Entrepreneurship in Africa report noted, is a “pervasive informal sector.” This means that a lot of the “perks” traditionally associated with investing in public markets don’t apply when it comes to the African financial landscape, not until the markets are more regulated and formalised. For instance, the number of companies which are listed is a lot more limited, thus reducing an investor’s choice of exposure. Ghana Stock Exchange (GSE), for example, has 36 listings as of July 2013.
These markets, being relatively young, are also much more thinly traded than their developed market counterparts. This renders an investor’s capital quite illiquid because there are less trades made (less counter-parties willing to buy and sell to one another) and therefore one’s scope for both buying and selling a share is scant. Consequently, African markets can be quite volatile.
Because there are fewer listings, single companies can often dominate a regional index, and have the capacity to influence that region’s financial market significantly because of its great weight in the market. Investors may have to stomach sharp moves (up and down) without being able to get out of their positions so easily.
Some have turned to South Africa as a “gateway to Africa” considering the country’s highly developed financial markets. The JSE has been active for about 125 years, and has grown to hold a market cap (number of shares multiplied by their respective share prices) of over US$579 billion. It is currently one of the top 20 largest stock exchanges world-wide. Consequently it offers liquidity terms which are highly attractive, particularly in comparison to other African exchanges.
The problem is, South African growth is minimal compared to the opportunities out there in the rest of Africa. South Africa is growing at a slower pace and some of the themes (growing consumer base, mobile penetration) are more primed for growth in other African countries. For example, South Africa’s GDP growth rate in 2012 was 2.5% compared to Nigeria’s 6.3%. Couple that with Nigeria’s larger, and growing, population and you’ll see why growth opportunities outside of South Africa are too big to ignore.
Investors going into the South African financial market are therefore sacrificing some of the capital growth potential which could be achieved through direct exposure to other African markets, in order to gain preferential liquidity terms and oversight. It’s up to you as an investor to decide what you value.
There is a third choice though, and potentially the most attractive one for the savvy (read:hard-working) investor: Private Equity. While private equity is certainly not the only way to access Africa, it is the timing right now that makes it such an appealing option. Although requiring a higher degree of investment knowledge and hands-on participation, and groundwork, the private equity space (VC, Angel et al) has some major advantages for those willing to put in the time and effort.
Investors have a much broader selection of companies with which they may choose to get involved with and, as private investors, have much greater access and control regarding how the companies are run (because you get into the company earlier in its lifecycle), as opposed to being an “anonymous” investor in a public market.
Furthermore, as a private investor, your capital is not as vulnerable to the whims of other public participants buying and selling stocks on a public exchange. Although you are still probably looking at a long-term investment horizon (five to seven years), you may achieve similar or greater capital growth than a stock exchange, with a more stable, or at least predictable, trajectory.
Perhaps the most compelling argument for private equity is that the time to act is now, before financial markets develop further. As countries across Africa grow, their financial markets are bound to grow and develop with them, moving away from the informal sector.
This means we will be seeing increasing IPOs, increasing trading volumes and more stringent regulatory bodies overseeing the markets. So would you rather invest in a company now, and participate in its ultimate IPO, or get in with the herd after the fact? That is the question a lot of private investors need to ask themselves when considering which way they would most prefer to access the great “African growth story”.