Why Africa’s investment landscape is on the rise

Africa’s stellar economic performance over the past five years can partly be linked to huge domestic demand, foreign investment, strong commodity prices and improved economic governance. The landscape is gradually changing in 2015, with regional differentiation increasingly coming to the fore as commodity price weakness underlines single commodity dependence economies, exposing fiscal vulnerability – and the spotlight is now being shown on a burgeoning of opportunities in other markets and sectors.

With this, while certain markets within Africa are expected to experience a slight economic slowdown, on aggregate, the economic growth trajectory for the continent on the whole remains robust. There is regular news of discoveries of oil and gas deposits in African countries, or advances on production. Furthermore, Africa’s unmatched agricultural potential and rapidly growing consumer markets continue to drive growth. For instance, countries in East Africa – in particular – are key suppliers of commodities such as flowers, coffee and tea – on the other hand Nigeria has experienced significant growth in their emerging middle class. Therefore, against a backdrop of sluggish economic recovery and divergence in economic cycles on the global stage, the regional differentiation within the African continent continues to present legions of keen business and investment opportunities within Africa.

The opportunity landscape

Tapping into this growth; while concerns about ‘red tape’ and perceived corruption are still top of mind for investors who are looking to enter African markets, potential complexities related to these two issues are being overcome, as the reality is that every investment risk can be priced – if investors have the right appetite and take a long-term, risk-adjusted approach to their investments. Additionally, as a means to better negate complexities or issues surrounding ‘red tape’ and perceived corruption, throughout our ongoing interactions with investors, it is clear that there is a growing consensus that investors are more keen to do business in sectors that have little to no direct involvement with government or through structures that limit government control and undue influence.

For instance, numerous African investors – and those from across the world – are realising that the best way to exploit the significant growth potential on the continent would be to invest in sectors that leverage on, or talk to the fundamentals of Africa’s growth story. These include; the geographical size and sheer diversity in the markets on the continent, the young population and, the very high rate of urbanisation in Africa that generates significant local consumption due to increased disposable or discretionary income among the emerging middle class. These socio-demographic factors are not only a positive show of sustainable growth in certain economies, but also demonstrate that there will be rapid growth in needs and demands for consumables. This bodes an immense opportunity for investors in consumer facing sectors – including, but not exclusive to; fast moving consumer goods, healthcare and financial services. Additionally, in most African countries these sectors have been reformed, where they are predominantly in private hands and there is a clamour for improved services and efficiencies, which will be best achieved through increasing competition and bringing new innovations, solutions and products to local markets.

This, however, is not to say that the old favourites such as mining activities and infrastructure development, including transport, energy and utilities for example, won’t still see a share of investment. There is still a huge need and growing demand for all of these sectors in Africa and as such these segments are still very popular for investment, depending on the investor’s risk appetite. Although as these sectors are largely government controlled, typically investments into these sectors are more often driven through government-to-government relations or public-private-partnerships.

If we then examine possible deal structures that are increasingly going to become driving forces behind ongoing investment, Africa is brimmed for a significant boom in both private equity and merger and acquisition type deals.

Private equity has been growing steadily

Although still maturing, the private equity (PE) landscape in Africa has already experienced significant transformation over the last two decades, where today there are over 150 fund managers managing billions in funds targeted specifically at Africa.

The rationale for PE investment in Africa encompasses a plethora of incentives; over the past decade the continent on aggregate has made strong progress towards political stability, fiscal consolidation and targeted expenditure in priority sectors, large-scale transport and power capacity infrastructural development and, the establishment of a focused and transparent monetary policy framework. Additionally, tantalising draw-cards of high economic growth, a favourable demographic dividend and vast natural resources continue to lure financiers and dealmakers from four key corridors, including China, Europe, the U.S. and intra-Africa.

Anticipating an upswing in mergers and acquisitions

The global economic slowdown post the recession of 2008/9 has had an impact on Merger and Acquisition (M&A) activity in Africa and until approximately the last twelve months. However, over the last six months – and certainly the first quarter of this current year – there is significantly more elasticity in the market again, with a much better climate for transactions and deals.

We are therefore anticipating an upswing in M&A deals in Africa, which can be attributed to current and increasing economic activity in a number of major markets on the continent, as well as inbound investments from the likes of India, China and other countries. Some of the regions that pose significant opportunity include; Kenya, Ethiopia, Nigeria and Democratic Republic of Congo (DRC) as each of these countries have high populations and fast growing consumer markets. In line with this, sectors that are consumer facing are expected to see significant interest and possible M&A activity, including; fast moving consumer goods companies, telecommunications companies, financial service, pharmacare and healthcare.

Outlook for doing deals in Africa

The story of the African market entry environment is fairly well told, in that information is quite widely available on; which countries are growing and at what rate and, which sectors are contributing the most to this growth. To a degree, this enables investors to benchmark certain characteristics of African countries, such as ease of doing business, labour laws, foreign investment rules, etc. However, to take things a step further or a level deeper, the granular analysis of what precisely is driving this growth per sector seems to be missing – and this is crucially important to any market entry or investment strategy.

To determine the sector attractiveness, for instance, investors need to be informed on what is driving growth in the sector and expected future trends. Further to this, investors should be informed on key market influences and the impact these can have on the growth driving forces, value chains, or key role players and any specific issues they are faced with (e.g. cultural nuances). Investors will also need an outlook for the sector, both from a demand-supply point of view and, the regulatory framework point of view, i.e. what legislation national Government may be planning to rollout in the sector. Added to this, when looking to structure an optimal deal, the current reality is that some markets in Africa are more established, equipped or sophisticated and regulated than others – and sometimes that’s not good, because investors want to know what they are dealing with.

This is where an in-country deal advisory expertise becomes invaluable, as not only would this partner be able to provide investors with intelligence and perspective on all the local issues, market climates and regulatory frameworks, incentive instruments and investment criteria, but also guide investors throughout their market entry strategy and establishing their investments – so as to best avoid potential issues and take full advantage of the growth of Africa, while still learning about the market.

There is no denying the burgeoning opportunities in Africa, though these do still come with its own set of challenges. While in recent times, the level of coverage in Africa has increased significantly, albeit that this coverage is still not at the ideal level it should be and, this is largely due to the fact that in Africa there are 55 different countries and, each with a number of markets and varying investment climates – this innately makes Africa incredibly diverse and complex. However, with the right market entry strategy and advisory partner, all complexities can be navigated and there is unlimited potential major returns to be gained for investors who are seriously looking to expand their business and want to take advantage of the Africa rising opportunity.

Author: Dapo Okubadejo, ‎Partner & Africa Head, Deal Advisory & Private Equity at KPMG

Image: Cape Town harbour REUTERS/Mike Hutchings