Investors jumping onto the Africa bandwagon

According to research carried out by Ernst and Young, Africa should attract new investment over the next few years as emerging market investors search for higher returns and foreign perceptions of risk improve.

The global accounting firm estimates that foreign direct investment (FDI) into the continent could reach US$150 billion by 2015 from $84 billion in 2010. Asia has been identified as the only continent ahead of Africa in terms of investor perceptions. “While Africa’s challenges are well documented, there is an increasing recognition that the continent is on an upward trajectory; economically, politically and socially,” Ernst & Young’s said in its 2011 Africa attractiveness survey.

While the International Monetary Fund (IMF) has warned that rising fuel and food prices are the main economic threats in Sub-Saharan Africa and that monetary tightening has failed to keep pace, economic growth in the region has firmly returned to pre-financial crisis levels. The IMF has reiterated its forecast of 5.5% GDP growth for the region this year and 5.9% in 2012, with low-income countries that make up the bulk of the continent expected to recover the fastest. Ethiopia, for example is forecast to grow 8.5% this year.

Given the above average growth rates, Africa is becoming more attractive to global private equity investors. A survey recently carried out by the Emerging Markets Private Equity Association (EMPEA) reveals that over the next two years, nearly 30% of global private equity investors plan to expand their private equity investments in Sub-Saharan Africa and about 10% are planning to start investing immediately. These statistics put Africa ahead of markets such as Turkey, the Middle East, Russia/CIS, and Central and Eastern Europe. According to EMPEA data, funds of about $2 billion were raised for Sub-Saharan Africa, Northern Africa and the Middle East in 2010.

Our own surveys have also revealed that private equity firms are creating teams and raising new funds to target investment in Africa. Carlyle Group, for example recently opened offices in South Africa and Nigeria and believes that the continent is one of the fastest-growing regions in the world. According to various sources, the Washington-based buyout firm raised $500 million for its first Middle East and North Africa fund in 2009, and is now looking to raise another $500 million for its first fund targeting Sub-Saharan Africa. Vital Capital Investments LP, which invests in housing and agriculture in Africa is also reported to have raised more than USD 250.0m for its first fund and plans to get another $250 million in the near future.

In our view, key sectors targeted by investors include agriculture, consumer products, infrastructure, telecoms, financial services and mining. Given the positive sentiments, Africa is fast becoming one of the most attractive investment destinations of our times.

Article written by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.