By Anthony Desir
If you know the answer to the question “who discovered Africa?” then there is no need to read further. You already know where your money is going, and you have no need to look for hidden gems.
If you are smart enough to realise that this must be a trick question keep reading and you’ll know where the trick lies, and how to answer next time someone asks.
The fastest way to understand investing in Africa is to try to get your head around some simple but incredible facts about the continent that would astound even a cynical investor like myself. I like to use bellwether concepts and the continent’s mobile phone market is a great place to start. Believe it or not, Africa’s 750 million subscribers total more than the US, Europe and Latin America combined!
If that seem too incredible to make sense, remember that the continent’s 54 countries lagged the rest of the world in copper wire land line telephone penetration— and still does even now. Mobile service has been a simple solution for getting a large mass of urban and rural users connected to communications and the internet wherever a local broadcast tower is set up. Running wire lines can take years in acquisitions, planning, and execution and it is expensive. Setting up broadcast towers has been quick, simple, and inexpensive with broad coverage footprints. People on the ground responded in ways no one could imagine.
The big surprise for everyone — yes including me— was how quickly paid subscribers filled competing networks. In many instances users have been signing up on multiple networks to take advantage of closed network marketing promotions that allow them to save on intra-network services. So what was once a problem — no reliable landline service — has turned into an opportunity where an entire continent bypassed a fading technology to leapfrog past developed economies in one particular business sector. This was no accident and it will continue to repeat itself.
Go back 10 years and ask if the hidden gem was Microsoft (marketcap @$260b) or Apple (marketcap @$45b)? Come back to the present and ask yourself if you want the opportunity that everyone thinks they know, or the one that has yet to be discovered? Frontier markets and emerging economies really are the undiscovered lands, especially when we look at technology convergence and knowledge transfers.
If I have your attention, then please come on this quick tour of Africa with me. Some of you may think you know the continent from repeated news reports with snapshots of appalling misery, the place I am taking you to is different, so get ready for another surprise.
“Africa” is not a country— it is one huge continent that can at the same time fit the US, Eastern & Western Europe, Japan, China, India, Mexico, and the Iberian Peninsula. Once you get your head around the geography we can begin to visit its 54 countries that is home to 1.1 billion people. And, it is the people who fascinate and excite most.
Africans speak almost 3,000 different languages with 15 of the common tongues spoken by 85% of the population. Nigeria alone boasts 500 languages, and in most countries— even in undeveloped places with limited formal education— multilingualism is normal. It is not unusual to meet a person from the continent who has had no higher education, but who can communicate, trade, and negotiate in more languages than graduates of top American and European universities.
Before I discovered Africa, I too was warned about a dark continent that was an investment black hole. No one mentioned that it held 86% of the world’s chrome ore, or that fork that fed me my breakfast was the taste of Africa with each bite of chrome covered metal that I put in my mouth. Other African mineral reserves rank first or second for bauxite, cobalt, diamonds, phosphate rocks, platinum-group metals (PGM), vermiculite, and zirconium, with plentiful ore deposits throughout the continent. Have you ever considered that you cannot eat a meal, turn on your mobile, start your car, or even read the rest of this article without a product from Africa helping to make that happen?
If the continent is so important to us, why is it that we have been in dark about its importance? Why all the bad news? A very simple way to answer these questions is to remember that hype sells. Whether we are hyping hot stocks or hyping a press clip, alarming statistics gets your attention. “Blood diamonds” stays in your mind more than hearing that the diamond cartel has willingly funded that yarn to help kill competitive supplies not under their control. The Ebola threat is a better headline than the regular flu epidemic that has killed more people in the US each week during the peak of African Virus.
Speculation and anecdotes are easy to refute — so where are our hard numbers that prove the case? The International Monetary Fund estimates that the real GDP of sub-Saharan Africa as a whole will grew by 5.1% and 5.8% in 2014 and 2015, respectively. Compare that to the U.S. economy expanding by 3.1% in 2015, and the Eurozone growth of only around 1.3%.
So if the fruit is ripe, who is picking it? Africa’s largest single investor, by country of origin, is China. More than that, of China’s overall global FDI, Africa is has been its single largest investment destination. Sino-African cross trade totals more than US$300 billion, with China holding more than $220 billion in Africa equity, according to the Heritage Foundation. If you have heard about China money flooding investments in domestic property or equity markets, then this is a small knock compared to noise they have already raised on the continent.
Don’t be fooled— China’s investments — even “private” money is always backed by State Owned participation when you drill deep behind the Cayman and Hong Kong holding companies. This is as true of China’s purchase of the Waldorf Astoria, as it is of the big listing for Alibaba, with major stakes allocated to privileged members of the communist party years before any listing.
The IMF, The World Bank, and IFC are NGOs (look past the alphabet soup please, we are after the meat!) that have all been left behind as China stormed into Africa in the last 8 years and managed to buy almost anything of value for sale, including bulk commodities and African politicians. Before, we scold the Africans keep in mind that here in the US PACs, think tanks, lobby groups, and rich donors do exactly the same thing, albeit with just a bit more transparency.
The climate is better understood if we imagine one giant PAC (China) coming to every one of the 51 US states (54 in the case Africa) and funding every governor and every local legislature and then getting first call on any industrial output. Well off course Africa has no President, no congress, and no federal body to help manage its continental agenda so you can easily understand how China has become an economic force on the continent.
Where is the US presence? David Snowball, publisher of the Mutual Fund Observer newsletter, estimates that only about 0.3% of the average portfolio in the U.S. — just $3 out of every $1,000 — is invested in Africa. China by contrast, has spend about $150 per $1,000, or 50 times as much while we are reading the bad news. During our distraction about the doomsday headlines, African growth has been about double the US in most places, even while waiting for your origination capital so that local entrepreneurs can finally muscle out even the Chinese State Owned Companies (SOES) that have their leaders in pocket.
Perhaps we might comfort ourselves with the idea that maybe Africa is a hot market, but too remote to understand and quite ready for prime time? So what does the smart money think? “We believe that Africa could be the ‘emerging market’ story of the next decade,” says Mark Mobius, executive chairman of Templeton Emerging Markets Group and manager of the Templeton Africa Fund. Bingo! Even the institutional money is starting to read the tea leaves.
So here is where we begin to close our thesis; the gem isn’t a blood diamond and it won’t be hidden much longer, and if you happen to own a part of it before the other investors turn up your risk profile is much lower than theirs and your margins are much higher — it is that succinct.
In June of 2013 President Obama got on the bandwagon in a rediscovery of the continent. He pledged US$7 billion for a Power Africa initiative that would fund clean energy. Six months later the Chinese government announced that they would spend $83 billion a year for the next 12 years on competing programs. Since then the Obama plan has already drawn in US$20 billion more from corporate USA that is committed to his energy programs.
Corporate cash and Chinese dollars already committed to Africa development but not yet spent is not inflationary— it is the seeds of irreversible growth and development. But that money is still not stroking African entrepreneurs and small businesses who originate the simple ideas that will turn home grown enterprises into elephants, much of it is committed to grand projects involving large institutions.
Consider America and the Wild West? The investment pioneers didn’t start out funding the railroads, the ports, or the grand enterprises. They were local, and they grew as the country around them grew. And that is where you come into this picture. Africa is open for business, and while government patriachs are being wined and dined by Chinese and corporate money, the small players who know the local landscape are hungrier than ever for capital partners who want to grow with them— your name goes here!
So who discovered Africa? Well, why not you? The fact is that Africa is not undiscovered country; it is not even a country. Here is a newly funded land, rich with opportunity and ripe with promise, but still a dark spot on the investment map. Here there are knowledgeable local entrepreneurs hungry for partners who can share the bounty; and that could easily be you. It is a different place, and it is a place where different strategies are needed every single time, but the numbers already tell us that this is real.
Shelly is pointing at his watch so I have to sign off now. So next time, let’s go from where and why, to what you should be looking for.
Anthony is SAMI’s head of Corporate Finance and the fund’s lead partner in Asia, where he has developed a representation relationship with one of China’s leading SOE investment banking groups. He has headed the China- Africa investment consultancy practice since 2007, and is recognized as one of the region’s experts on China-Africa resource capitalization solutions.
He is an experienced professional who has been a featured presenter at a number of industry forums, and an author and columnist who has been profiled and interviewed in resource publications which promote independent market analysis. He is an active University guest lecturer at Hong Kong University Business School, Perking University (Shenzhen), City University (Hong Kong), and a regional TV commentator.
His focus is on originating innovative corporate finance programs and solutions for institutional clients. His active client base includes unlisted resource companies, global and regional banks, listed entities, and China State Owned Enterprises.
He has lived and worked in Hong Kong since 1990. His career began in New York, where he worked as a banker and a management consultant to US based money centre banks and multinational insurance companies. Anthony graduated from Dartmouth College, with honours, in 1981.
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