Why do private equity firms prefer certain markets in Africa over others? When one examines the risk factors for high growth in Africa, it is clear why these markets receive such high levels of interest. There are a couple of major risk factors for high growth in African markets and the countries that stand out as possible investment destinations.

Despite ample evidence that increased economic integration can bring large gains in wealth and welfare, Africa has been slow to increase its level of connectedness. With 54 countries, more than any other continent, with French, Arab, English, Portuguese, German, Spanish, Dutch and Italian influences mixed with numerous indigenous languages and cultures (There are over 2000 languages spoken in Africa) it is difficult for businesses to target a large enough market to obtain sufficient scale. This has been reflected by businesses being found to be 25% smaller in Africa than the average enterprise in other markets. The bulk of exports are still to former colonisers, with identical goods and services being imported by other countries within the African marketplace. In order to mitigate this risk investors in African private equity have opted to enter the market through the few large economies. The recent move toward integration in the East African market has also resulted in increased interest in this market.

Examples of countries with both large populations, and a high percentage of urbanisation are Nigeria, Angola, South Africa, Egypt and Algeria.

Good infrastructure including electricity and water supply, roads and schools are essential for business to flourish. Much has been written about the infrastructure gap in Africa, with losses due to poor infrastructure being estimated at as much as $40 billion per year in GDP. Transport cost is about 50% higher and only about 5% of agriculture is under irrigation. These particular stumbling blocks go a long way to explaining the slow uptake of agricultural opportunities on the African continent (along with land ownership issues).

Examples of countries with high domestic material consumption are South Africa, Seychelles , Algeria, Morocco, Sudan, Egypt and further down the list also Kenya and Nigeria.

A further consideration for investment is a stable political and legal environment that fosters competitive enterprise. Traditionally Africa has had a poor track record in this regard with corruption being rife, respect for private property rights being poor and economic activity frequently being interrupted by civil wars and coups. The reality of the political landscape is definitely changing in Africa with some regimes actively trying to eliminate corruption and decrease the level of political upheaval. However political risk remains a real risk that heavily influences investment decisions.

Examples of countries with a high ranking in the Transparency International’s Corruption Perception Index include  South Africa, Botswana, Namibia Ghana, Tunisia and Senegal.

When one then looks at the countries that received the majority of the foreign direct investment in 2012, this is Nigeria, Mozambique, South Africa, Morocco and Ghana. It is thus clear that capital will continue to flow to countries that have sufficient markets and infrastructure to support growth as well as low political risk.

– Heleen Goussard
Associate, RisCura Fundamentals

Sources

Economic development in Africa report 2012: Structural transformation and sustainable development in Africa, United Nations, New York and Geneva, 2012
Business Monitor International
Africa by numbers: Assessing market attractiveness in Africa, EYGM Limited, 2012
Drivers of growth: Evidence from Sub-Saharan African Countries. IMF Working Papaers, 13/236, November 2013
World investment report 2013: Global value Chains: Investment and trade for development, United Nations, New York and Geneva, 2013

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