Hungry for opportunities, European investors eye Africa’s unlisted firms

The uninspiring granite exterior of the London Stock Exchange provided the quiet backdrop for a meeting that would almost have gone unnoticed, if it did not have such a strong bearing on Africa’s growth prospects.

A fortnight ago, Rwanda President Paul Kagame, former British Prime Minister Tony Blair and  African Development Bank (AfDB) chief private equity officer Martin Poulsen were on the roster of speakers at the one-day executive summit on private equity placements in the continent.  

Insiders at the discussions say new growth opportunities topped the agenda with leading industry group Emerging Markets Private Equity Association (Empea) reporting that fundraising activity in sub-Saharan Africa has almost tripled from $800 million (Sh60 billion) in 2005 to $2.2 billion (Sh160 billion) in 2008.

Analysts interviewed by Africa Insight spoke of a gradual shift in thinking, with the private sector being seen as providing the needed growth momentum for a continent that has taken a beating following the financial crisis that western markets are emerging from.

The credit squeeze halved Africa’s growth rate from 5.7 per cent in 2008 to 2.4 per cent in 2009, according to World Bank estimates.

The Nigerian bank crisis — in which banks were left holding toxic assets following a loaning spree— means that investor confidence in the continent’s public equity has taken a knock and they are now looking at private equity—the taking of shares in unlisted companies – as a more viable option.

“If investing in Africa has to face the downsides of private equity, it should have the upsides as well, hence the greater focus on private equity and special situations opportunities,” said Michael Hugman, Emerging Markets Analyst for the South African Standard Bank.

President Kagame’s presence may have been interpreted to mean that while investors were willing to pump in more money, they will also need reassurance that their investment would be safe in a continent where returns are high, but the risks even higher.

Increased money from natural resources and better business policies are seen to be driving the increased interest from yield-hungry Western investors looking further afield as they seek to diversify their portfolios.

Rwanda, with a driven reform project, was the top gainer in this year’s Doing Business 2010 Report, indicative of the President’s quietly effective crusade to sell the tiny eastern African nation as a business hub.

The AfDB also seems to have latched on to this thinking. The bank is set to commit some 20 per cent of its private sector budget –about $200 million – to private equity lending on the continent. It will, however, be seeking to strike a balance between its development mandate and investors’ appetite for big returns.

“Africa equity is a sector that is unproven,” Mr Poulsen said, adding that risk was the big factor in the reticence by equity funds to put their money in the continent. 

The expected renewed investment means that countries such as Nigeria, Kenya and Ghana, which have advantages of scale, are likely to be the big gainers, as are those such as Rwanda, which have a stable macroeconomic policy and limited political risk.

Mr Blair, who last year formed his Africa Governance Initiative, has been an enthusiastic supporter of private sector investment in the region.

“Many still hold a number of misconceptions about Africa which are no longer valid; there are a large number of untapped opportunities. The time is right to invest in Africa, “he told the London summit.