Should investors target Africa in tough economic times?

The evidence is clear: Africans are increasingly entrepreneurial and there’s a lot of investment value to be unlocked in Africa, writes Spear Capital partner Bryan Turner. He believes with the right partners, international investors can benefit from that value whether or not there’s a global recession. 

South Africa’s inflation has hit a 13-year high of 7.8%, electricity tariffs have again increased and the soaring fuel price is making transport a luxury for many. Understandably, companies on the lookout for capital are moving away from relying on stock market investors and favouring private investment – as is clear from the number of delistings from the JSE in recent months, a number which now outweighs the listings.

But, the perception of the risk is not held by everyone, as reflected in a speech given earlier this year by the President of the African Development Bank Group, Dr Akinwumi Adesina, who assured US investors that Africa is a secure, competitive and profitable market for investment.

In fact, interest from investors in the region has not waned: the number of private equity deals in Africa increased from 230 in 2019 to 255 by 2020, and the number is likely to have increased even further in recent months. In addition, there is plenty of evidence to show that emerging economies have the potential for faster growth and inflation-adjusted returns. There is also far less competition to get into the investment market in these economies than there is in Europe or the USA, making them an ideal investment haven.

Countering ‘common sense’ narratives 

At face value, that sentiment may seem like it runs counter to traditional common sense investment narratives. After all, emerging markets that traditionally yield a high risk and high reward see an early selloff at the mere grumblings of economic trouble. In 2008, for example, emerging market stocks and bonds bottomed out in October, 8 months before the US exited its recession. Similar patterns were observed in 2021, with an emerging market sell-off taking place a full year before it began in the developed world.

But, for savvy investors, that earlier drop off represents an opportunity. By the time a recession arrives in the developed markets, emerging market assets are available at a substantial discount, allowing investors to reap the rewards of the upswing.

That said, there’s also a case to be made that, even outside of recessions, the risks in some African markets are no greater than those in the UK, Europe, or the US. If the past two years have shown us anything, it’s that these markets are far from immune to seismic political shifts, catastrophic natural disasters, and major wars.

The growing case for African investment

That’s before you even get into some of the very compelling reasons to invest in Africa. And there are plenty of those.

Take age, for example. The median age across Africa is 19.7 years old, with 40% of the population aged 15 and under. Those young people are also increasingly well-educated and connected (thanks to the increasing ubiquity of smartphones and affordable internet connectivity). That not only makes them more sophisticated consumers, hungry for the same experiences as people in the rest of the world have, it also means that they’ll be better capable of staffing the businesses that will drive the continent’s growth.

And, despite the damage wrought by COVID 19, that growth is returning. While the global slowdown is expected to see growth in Sub-Saharan Africa sink from four percent to 3.6% in 2022, a return to anything like normal economic conditions should see it accelerate once again. Remember that, as recently as 2019, six of the world’s 10 fastest growing economies were African.

It’s also worth noting the evidence showing that Africans are increasingly entrepreneurial. According to the Global Entrepreneurship Monitor, for example, levels of entrepreneurship in South Africa (the region’s most advanced economy) have risen dramatically since 2019. Those entrepreneurs are also increasingly visible to domestic and international investors. In 2021, private investment in African businesses hit a record high of US$7.4-billion. That’s more than double what was invested in 2020.

Rising to resilience through investment

Perhaps the strongest case for investing in African businesses, however, comes from the fact that they’re able to grow and thrive even in markets where you wouldn’t expect them to.

Take Zimbabwe, for example. Over the past two decades, the focus of the media has tended to be on negative issues about the country, painting a picture that may suggest to outsiders that there is too much instability in the country. And yet, there are businesses that are thriving. Our own portfolio company, Metro Peech and Browne, is one of them. Over the past eight years, the wholesale retailer has grown from seven to 21 stores, expanded its footprint, and introduced a variety of new product offerings.

It is, in other words, a very good example of a company thriving in spite of the challenging conditions around it. There are many such companies across the continent and, with the right investment, they could achieve even higher growth rates.

Experienced partners necessary 

Of course, investors cannot simply pick African companies and hope for the best. They need to partner with funds run by people who not only understand the continent, but the markets and sectors they wish to invest in.

The people behind these funds understand the inherent risks and can mitigate for them. Additionally, they have a much clearer idea of how to invest in businesses beyond funding, providing expertise and acting as a bridge between international investors and local companies.

Ultimately, there’s a lot of value to be unlocked in Africa. And, with the right partners, international investors can benefit from that value whether or not there’s a global recession.

• Bryan Turner is a partner at Spear Capital.

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