Investment group Silk Invest recently carried out an investor survey aimed at assessing investors’ views on investing in emerging markets. The main outcome of the survey, according to the investment group, was that most investors view Africa as a more attractive investment destination than other emerging markets such as Asia – 43% of participants viewed Africa as the most attractive, while Asia came in second with 37%.
An interesting highlight however is that nearly 50% of the respondents had no allocations on the continent. About 70% of them had less than 2% allocation to Africa. However, with sentiments on Africa changing, it is expected that more investors will start increasing their allocations to Africa thereby boosting portfolio flows to frontier markets and driving markets upwards.
Generally, consumer demand is the main economic driver for future growth in Africa. Population-related economic drivers appear to be the main reasons to consider investing in Africa.
We have also observed an increase in Africa-focused funds as interest in Africa’s growth story increases. It is worth noting that according to a recent study by the International Finance Corporation (IFC), about 10 years ago, just one African country held opportunities for private equity investors. However, today the continent of more than 1 billion consumers and home to some of the world’s fastest growing economies (Tanzania, Ghana and Ethiopia) – holds at least 21 countries with opportunities for private equity investors seeking high returns.
Furthermore, recent news on hedge funds is that HSBC has launched a new frontier market fund. Nigeria and Vietnam are among the countries targeted for investment by the new fund. The HSBC GIF Frontier Markets Fund will be a long-only equity portfolio, offering private investors access to frontier markets. The fund, is however still awaiting regulatory approval before being registered in the UK.
HSBC’s research forecasts that by 2050 the collective size of the economies we call “emerging markets” will increase five-fold and will be larger than the developed world, with 19 of the 30 biggest economies being from the emerging world (Africa included).
In conclusion, we share similar sentiments that Africa presents exciting investment opportunities in the area of listed equities as well as private equity. “Africa is among the last great frontiers for private equity,” we quote Stephen Murphy, MD of Citadel Capital, at a recent conference in Nairobi, Kenya. “This simple fact often leads to the assumption that African private equity investments are too risky, too commodity-focused and too difficult to exit…Do your homework, though, and a different picture emerges: Africa is about opportunity – the opportunity to do better because of brighter macroeconomic fundamentals, and on a micro level because of its natural resources,” Murphy added.
He also pointed out that in the past decade, the S&P 500 has had negative returns, while the MSCI Emerging Markets Index has returned 163%. According to him, Africa offers private equity investors strong underlying economic growth, low competition for deals, low levels of financial risk, and the ability to have a real impact on the communities in which you invest. We couldn’t agree more.
Imara is an investment banking and asset management group renowned for its knowledge of African markets.