The crystal ball

Where, in Africa, are the most canny investors putting their money?  Anver Versi reports on the latest trends

Crystal-ballThe most valuable item in an investor’s toolkit is a crystal ball that is as accurate as is possible to obtain. Investors plant today to reap tomorrow – but tomorrow can be many years away. Things can change dramatically between now and then and what seemed like a golden rainbow can turn to a heap of ashes. That is why an investor needs a crystal ball to enable him to ‘see into the future’.

Successful investors all have crystal balls they can depend on – most of the time. But they do not rely on magic – they use observation, knowledge, analysis, synthesis and closely follow trends to lay out their investment plans.

What are canny investors telling us about the growth areas in Africa over the next few years? Where are they putting their money? If we ignore the traditional big-scale investors in resources such as oil and gas, commodities and minerals (as they make their judgements based on predicted international demand and supply of these commodities), the strongest trend we see is the rise and rise of private-equity investors looking for opportunities in Africa.

Private equity (PE) investors, both domestic and foreign, typically raise funds which are then invested in local ongoing enterprises that show potential for growth and expansion. The PE investors also bring in advanced managerial and technological skills. The aim is to raise the value of the company and thus their own shares, and exit after a period with a handsome profit.

What are the PE money-managers’ crystal balls telling them? “African entrepreneurs now boast about being approached by one of the many private-equity investors scouring the continent for opportunities,” says The Economist. “And it is the financiers, or at least those from beyond Africa, who are having to adapt. Money managers on Wall Street and in the City of London are taking crash courses in Swahili and learning to find Ouagadougou on a map.”

The volume of investment funds raised for Sub-Saharan Africa has risen from US$2 billion in 2008 to an estimated US$14 billion in 2014. Which sectors are the most popular for PE investors? Dapo Okubadejo, partner and Africa head of deal advisory and private equity at KPMG, says some of the most attractive areas are in “meeting the current needs of the one billion plus population and the future demands of the rapidly emerging middle class consumers.”

Other reports show a steady rise in PE financing for FMCG (Fast Moving Consumer Goods), retail, services, franchises, household goods, construction, private schools and clinics, fertilizers and seeds and so on.

And what is driving this demand? The answer is the relentless rise of African cities, the traditional source of wealth creation. By 2030 Africa’s top 18 cities will have a total spending power of US$1.3 trillion according to global consulting firm McKinsey & Company.

“By 2050 African cities will have tripled their population,” says Professor Paul Collier, author of The Bottom Billion. “But two-thirds of the African city is yet to be built – this is a huge opportunity to get things right.”

The strongest image emerging in the investor’s crystal ball therefore is that of the growing African city and the huge demand this represents. Satisfying this demand is where the profits lie.