INVESTING IN AFRICA
by sangu delle January 08, 2012
fortnightjournal.com
PART 1

Last month, I accompanied a senior partner of Valiant Capital Partners (San Francisco, US) on a trip I had planned to explore investment opportunities in South Africa, Ethiopia, Nigeria and Ghana.

Since May 2011, I have worked at Valiant with 11 professionals who manage $3 billion in assets. As a fund, we have experience and success investing in North America, Europe, Asia and South America. But we have had very limited, to no experience in Africa. Born and raised on the continent, and Ghanaian and Egyptian in heritage, I was thrilled to combine my four years of investing experience and eleven years of Africa development and non-profit work to help change this.

Now, Africa is not one giant country, but rather 53 different countries. There are huge differences from one to the other. Selecting which countries to visit in the space of 12 days—taking into account investment opportunities, risk and breadth of experience—was no small challenge. I eventually narrowed the 53 to four countries that I felt would give a broad and rich experience: South Africa, Ethiopia, Nigeria and Ghana. The glaringly missing part of the itinerary was Kenya, and East Africa more generally. We unfortunately had to skip Kenya because of some security concerns and time constraints.

At the fund, our investment objective is to generate superior risk-adjusted returns by employing a flexible mandate that allows us to search around the world for the best investment opportunities. While the majority of our efforts are focused on publicly traded equities, we do invest across the capital structure opportunistically (both long and short). In addition to public equities, we also invest about a third of our assets in private equity (growth capital). We have a very strong bias toward international markets, where we believe there are more compelling investment opportunities and where our research process is likely to yield the most tangible, differentiated results.

Besides my obvious bias, I genuinely believe that Africa presents some of the most compelling risk-adjusted returns anywhere in the world. For the decade ending December 31, 2009, an African composite index made up of eight countries—including South Africa, Nigeria, and Egypt—returned about 14 percent annualized. South Africa alone returned an average of 13 percent per year over that period. Compare that with the MSCI Emerging Markets Index, which returned about 7 percent annualized, or the S&P 500, which lost about 3 percent over the same time period. GDP average annual growth over the past 10 years in Sub Saharan Africa is ~7% versus ~4% in the rest of the world. In fact, 9 of the 10 fastest growing economies this year are in Sub-Saharan Africa!

Africa is also urbanizing rapidly. In 1980, just 28% of Africans lived in cities; today 40% do, which is a proportion larger than India. Africa also has as many cities with population of 1 million or more as in Europe. That trend is accelerating as labor migrates to economic opportunity. Africa is also outperforming the United States and Western Europe in labor productivity gains.

Our first stop was Johannesburg, South Africa. South Africa was an obvious choice, being Africa’s largest economy and the 28th largest in the world, with over half a trillion in GDP. South Africa is incredibly interesting because a visitor will encounter elements of the so-called First and Third Worlds right next to each other. For example, in many of the affluent neighborhoods of Jo’burg, you will be amazed by the scale of development, and could easily think you’re in London or Paris. However, as you look deeper, you will observe some glaring differences: heavy fortification around buildings, with guards, barbed wires and high walls. South Africa’s extremely high crime rate can partially be attributed to its high rates of post-apartheid poverty, unemployment (a quarter of the population and over half of university graduates) and income inequality (in the top 10 in the entire world).

“In Johannesburg, you can get shot for a cellphone.” We heard this phrase a few too many times. We met with leading economists, political figures, business leaders and local investors. A good number of academics we spoke to harshly criticized the government’s Black Economic Empowerment policies for increasing black economic wealth and creating an emerging black upper middle class, but doing little to address broader economic disparities or to reduce poverty.

We met with some innovative non-profits, like Endeavor South Africa and the Awethu Project, which empower entrepreneurs from poor backgrounds and helping them grow their businesses. We concluded that South Africa still presented many exciting investment opportunities in business services, telecommunications, media, power, financial services, natural resources and agribusiness. With a population of 50 million people, there is lots of room for growth in terms of a vibrant middle class. It was interesting to see some forward-thinking US companies (like YUM! Brands who are present in South Africa with over 600 KFCs) dominating the QSR market. South Africa is a relatively easier jurisdiction for a US company because of its established legal systems, its deep and liquid public markets, and its internationally reputable reporting standards.

After three days in South Africa, we hopped on a red eye to Addis Ababa, the capital city of Ethiopia. With the second-largest population in Africa (85 million), Ethiopia is one of the fastest growing economies in the world.

Ethiopia was a remarkable place with beautiful people, amazing cuisine and so much opportunity. Ethiopian people have a strong sense of pride in their history. Ethiopia is home to the site of one of the oldest known human fossils. Ethiopia was also one of the four great world powers in the third century, alongside Rome, China and Persia. During the “scramble for Africa,” it was the only African country that retained its independence, having rebuffed the Italians. Ethiopians maintain a strong sense of pride based on that. And nearly every Ethiopian you meet will remind you that they invented the best-tasting coffee in the world (you will likely agree).

Unsurprisingly, Ethiopia is the headquarters of the African Union. Ethiopia is also noted for having the most powerful military on the continent, being the anchor nation for the African Standby Force (ASF). In spite of a history of poverty and famine in the 1980s, Ethiopia has come a long way and today is a leading economic, political and diplomatic force on the continent.

That being said, Ethiopia is no South Africa. In fact, Ethiopia probably ranked last in terms of infrastructure and state of development out of all the countries we visited. The development and infrastructure needs were glaring as soon as we stepped off the plane, when my iPhone didn’t work because no mobile data infrastructure existed. The road systems were still in their infancy, and, though their national airline excelled in its service, the Addis Ababa airport was remarkably small.

In Addis, we had a unique opportunity to watch a movie screening of “Mo and Me” (2006), a moving documentary that chronicled the brave life of Kenyan photojournalist Mohammed “Mo” Amin. Mo’s work spans four tumultuous decades of African history and led to his success as the most renowned photojournalist of his era. Salim Amin, Mo’s son and director/producer of this award-winning film shared insights into his father’s life. 

The documentary highlighted the shocking famines in Ethiopia in the 1980s, exacerbated by geopolitics and civil wars and resulting in the deaths of hundreds of thousands. Amin’s work on the famine led to widespread attention and global efforts to save the victims. We also watched a second documentary that showed national progress since then. Today, Ethiopia has been spared the drought and famines that are currently ravaging Somalia (and other parts of the Horn of Africa) because its government took lessons from the 1980s and invested in irrigation technology. Farmers are now trained in dry season farming techniques.

At the Africa Leadership Network Conference—a “premier network of young, dynamic and influential leaders” looking to drive prosperity “in business, public sector, academia, the arts and civil society in Africa”—we had a discussion with top Ethiopian government and business leaders about investment opportunities in Ethiopia. Some sectors we noted were consumer goods, agriculture, livestock and manufacturing. While Ethiopia is probably a little too early stage for our portfolio, it holds immense promise and we will be closely monitoring its development.

To be continued on January 22, 2012…

***

Sangu Delle is an entrepreneur from Ghana currently based in San Francisco, California. He is founder of African Development Initiative and CEO of Golden Palm Investments LLC, an investment company with private equity interests in agribusiness, real estate, financial services and healthcare. He is currently on leave from his MBA at Harvard University in order to work as Global Generalist at Valiant Capital Partners.