Angel investing in Africa (case study part 1): Canadian investor Jerome Kisting and Kenyan based m-Kazi

Recently M-Kazi closed their seed round with angel investor Jerome Kisting. This interview is the first installment of a three part series and abbreviates from an interview held with Jerome Kisting on Thursday the 22nd of November 2012.

Can you tell us about your background?



“I have a background working in finance and investments in Namibia. I became interested in the impact investing area 4 years ago. When I moved to Canada I got involved with an impact-investing fund, called the Toronto Enterprise Fund that gives grants to social enterprises. And it was a great introduction to the social enterprise business model and it broadened my perspective on business and what it can achieve.”

Please describe yourself as an investor

“I’m not the kind of person that will start a fund. I’m just curious and I want to try things and that is what this is about for me. I describe myself as an Angel impact investor. The money that I invest is my own resources that I’ve earned from other business transactions. ’I like the $25k to $100k range and what I also do is help channel some VC cash to the companies I’ve invested in. If a VC takes a stake, that is another milestone in the development of the business. If you can raise money from the VC’s essentially it shows that another party has vetted the business model and thinks that it can scale.

I made a couple of investments this year and I would like to give them some time to advance. The founders don’t need me on a day-to-day basis, it’s more a once a week call where we talk mostly strategy. So for now I’m focusing on my current investments, but will look at one or two more investments as I do want to create a portfolio over the next two to three years. The sectors that I’m interested in are food and agriculture, healthcare and technology – with technology I mean mobile, web and tech.”



What role do you see the Angel investor play and what is the opportunity to invest?

Richard Branson said: ‘You have to use money to make something happen’.  I really like to make things happen, so when I see an entrepreneur who shows traction, who takes his idea out on the street to ask customer X: ‘Will you buy this from me?’ If they can prove that to me, then absolutely I’m interested investing in the seed-stage. The lower the upfront investment, the greater your exit options are later. Because you don’t need to keep raising additional rounds and you don’t need to think about an IPO. For me it is key that a business supports itself. The lower the cash burn rate while the founders are trying different things and failing or succeeding fast the better because they will succeed at some point, or not. Of course you need funding to take the company to the next level, but the lower the investments the better. If you can’t show how the revenue model can be monetized in a relatively short time then I’m not interested in it because I’m not investing in capital intensive, four-year long R&D projects.”

Why do you look to Africa?

“I want to make investments that have a very defined social impact, but at the same time have a financial return. It’s interesting to see, especially because I’m looking at the African space, how you can still run a business and have a social impact. I choose to invest in Africa because I understand the dynamics in sub-Saharan Africa, I’ve done a lot of research; like a country analysis of Angola, evaluating the banks in Botswana and a lot of research on Namibia in the new energy sector. That’s why when I saw the M-Kazi profile on the VC4Africa website, I contacted Saskia from VC4Africa. From there I was introduced to Nancy and Lino.”

See the second part of this interview where Jerome talks about screening and structuring the angel investment with M-Kazi.
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"THE EMERGING COUNTRIES HAVE MONEY AND INVEST IN AFRICA. FOR THE FIRST TIME, AFRICA HAS AN ALTERNATIVE TO EUROPE.” EKOKO MUKETE

Ekoko Mukete, General Manager of the media group Spectrum, which owns two television channels in Cameroon, is an influential man in his country. He has been Vice President of the Cameroon Chamber of Commerce and Industry since 2003 and is also Chairman of United Bank of Africa (UBA Bank) in Cameroon, and Honorary Consul of the Republic of Turkey – a country which is increasingly investing in Africa. During the European Development Days (EDD), he came to present an Africa on the move and to talk about the African private sector’s contribution to the growth of the continent.

“A continent which has a real economy with tangible assets”, he explains, “in a world where the economy is tending to become virtual and where the financial system is based on the intangible. Yet Africa is real, with its population, its mineral resources and its land. It is high time that Europe recognized that it is the continent of tomorrow. Partners should change their approach. China, India – the BRIC group of emerging countries – have money and invest in Africa. For the first time, Africa has an alternative.”



For Ekoko Mukete’s generation, there is no longer any question of coming to hold out a helping hand in former colonial cities. “We are seeking a win-win partnership, on every count”, he insists, “Africa has something which Europe needs.”

Ekoko Mukete, who switches easily from English to French, embodies this Africa where language barriers are disappearing. In Cameroon, a bilingual country, he believes that the two languages of the former colonizers are “A blessing which has allowed Cameroonians to do business all over Central Africa.” He also points out that Rwanda decided to change from French to English, just like Gabon under Ali Bongo Ondimba, a President who alternates between the two languages in his own speeches.

A sign of an increasingly globalized Africa: “Côte d’Ivoire, a French-speaking African country, produces more presentation documents in English than Cameroon”, notes Ekoko Mukete. Another more well-known revolution underway is that of Internet. “A small business which sells masks in Douala can now sell them as far away as in Bora Bora or New Zealand. With this new technology, the only thing that holds you back is your spirit, your vision, the way you think. Young entrepreneurs who start up in Douala, Dakar, Libreville or Johannesburg can be global players right from the very first day.”

African diaspora is another anchor for Africa in the world and it is often underestimated – despite the decisive economic contributions they make, particularly via remittances for countries like Mali, Cape Verde or Somalia. For Ekoko Mukete, they are the “sleeping giant”. African diaspora are “A major asset for the coming years, if they return to their respective countries to grasp the opportunities of the better life that they have left to seek abroad.”

Yet the recurrent political crises in Africa could hold back this movement of return by African professionals trained and working abroad… and confuse the issue in the coming years for a private sector which must reckon with public authorities that are often predatory and sometimes unstable.

The trend, notes Ekoko Mukete, is that we are seeing private sector leaders in Africa become politicized, rather than political leaders taking the destiny of major groups into their hands – for the moment, the only exception is South Africa. In the case of Cameroon alone, “Businessmen have made money and have then gone into politics, by becoming mayors, so that they can have a flag on their car and satisfy their egos”, notes Ekoko Mukete. “This has affected business: these businesses leaders should have focused on business.”

This being said, the top business leader thinks that the private sector, in Cameroon as elsewhere, contributes in its own way to preserving peace. “People do not burn down buildings when there are demonstrations in Cameroon, because they know that these buildings belong to other Cameroonians and not to Lebanese or Greek people, as is the case in other countries. There is a sense of ownership which contributes to peace.”

ASEA: Unleashing Africa’s investment potential

The African Stock Exchange Association (ASEA) held its 16th annual general assembly and flagship conference in Cairo.

Under the slogan “Unleashing Africa’s Investment Potential,” the African Stock Exchange Association (ASEA) held its 16th annual general assembly and flagship conference in Cairo.

The chairman of the Egyptian Stock Exchange, Mohamed Omran, inaugurated the conference by speaking of the current challenges faced by the Egyptian economy.

“Let’s not look back in anger or forward in fear, but around in caution,” Omran said. “We need to unite and aim high,” he added.

Omran spoke of the potential the African continent harbours, with ever growing purchase power, a projected annual growth rate of 5 per cent in the coming years and a resilience towards global crises; all these factors will allow the creation of a “new Africa,” according to Omran.

The perception of Africa was at the core of the speech delivered by Sunil Benimadhu, the president of ASEA. He said that the image of Africa has changed over the past decade, from “the hopeless continent” to a more positive one.

In 2050, the top 10 economies will include two African countries, namely Nigeria in sixth place and Egypt in 10th place, India will replace the United States as the leading economic power in the world followed by China, according to forecasts shown by Benimadhu.

ASEA president gave a recipe to double Africa’s GDP growth; he emphasised the importance of continued improvement in business
climate, the implementation of inclusive growth, the enhancement of democratic principles and the substantial improvement in infrastructure.

Prime Minister Hesham Qandil said that a future democratic Egypt offers great opportunities for investors. “You are witnessing history, and we are proud of writing it,” said Qandil.

Qandil went on to discuss the preliminary agreement with the International Monetary Fund (IMF) and suggested it paves the way to
receive the necessary financing, and acts as a certificate of confidence for the Egyptian economy.

In his speech, the prime minister talked about the position that Egypt occupies as a major player in the African continent, a “continent full of potentials,” natural resources and human capital, which allows it to increase its GDP to $2.6 trillion in 2020 from $1.6 trillion today.

He concluded by calling upon attendees to improve the technical and legal infrastructure to achieve the desired integration between African markets, and asking the investors to invest in Africa.

Political developments and the democratic process were highlighted by the Investment Minister, Ossama Saleh.

Saleh pointed to what he called “historical changes” that took place over the past year.

“How to draw investment flows to the African capital markets?” was the main theme of a panel that encompassed financial and economic experts. Erik Bergolf, the chief economist and special counselor to the president of the European Bank for Reconstruction and Development, spoke on future measures: establishing macroeconomic stability, ensuring the health of the banking sector, developing local capital markets, improving general business climate and generating inclusive growth.

Muna Zulficar, the non-executive chairperson at EFG Hermes stressed the necessity of strong and committed investment banks for attracting capital flows and the independence of the judiciary to reduce risks of investment.

Zulficar said the Arab Spring has slowed investment in the short and immediate terms because of the perception of the transitional period, but has not stopped it completely. After the completion of the transitional period, “flows of investment will come back to Egypt in a more active way,” she added.

The chairman and president of African Export-Import Bank (Afreximbank), Jean-Louis Ekra, said that attention should be given to investment coming from African countries, the same as for investments coming from European and Asian countries.

During the day Benimadhu announced the launch of an ASEA Pan African Index based on the FTSE methodology.

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Commerce's Blank At Launch of 'Doing Business in Africa'

U.S. Department of Commerce

Acting Commerce Secretary Rebecca Blank

Remarks at Launch of "Doing Business in Africa" Campaign

Johannesburg, South Africa

November 28, 2012

(As prepared for delivery)

Thank you. Good afternoon. It is wonderful to be here in Johannesburg with all of you. I want to thank our sponsors:

First, the Corporate Council on Africa, which represents nearly 85 percent of all U.S. investment on this Continent. Thank you, CCA, for continuing to work with us to raise the profile of Africa in the U.S. business community.

Second, Business Unity South Africa. Thank you for helping ensure that the private sector continues to play a constructive role in this nation's growth.

I also want to thank Ambassador Don Gips, the U.S. Embassy staff, and the Foreign Commercial Service officers from the Department of Commerce who are based here, including Larry Farris. Thanks also to Undersecretary Francisco Sánchez and Assistant Secretary Michael Camuñez who continue to do such great work throughout Africa.

For decades, people around the world have talked about doing business in Africa. But today, it's real. It's happening. And Africa is rising as a result.

Just months after his inauguration, President Obama traveled to Ghana. He laid a foundation for the future of the U.S.-African relationship-a relationship based on mutual responsibility and mutual respect. He called for an era of deeper engagement among our leaders in government, business, and other sectors.

More recently, President Obama said he believes that Africa can be the world's next major economic success story. He's absolutely right. Sub-Saharan Africa is home to six of the 10 fastest-growing markets in the world. Economic growth in this region is predicted to be strong-between 5 and 6 percent-in coming years. And-most important-millions of Africans are finding a path from poverty to greater security, opportunity, and prosperity.

The United States is committed to helping build on and accelerate this success.

Earlier this year, the president reaffirmed that commitment when he issued the U.S. Strategy Toward Sub-Saharan Africa.

This Strategy directs the U.S. to dedicate greater support for efforts to strengthen democratic institutions, while continuing both to advance peace and security in Africa, and to promote opportunity and development. But most important for all of us today, the Strategy commits the U.S. to elevating our efforts to spur economic growth, trade and investment.

But before I discuss this in more detail, let me recognize the successes of the past four years.

The Obama administration has strengthened democratic institutions and challenged leaders whose actions threaten peaceful political transitions. We continue to support strong, transparent, democratic institutions that are guided by the rule of law.

The administration has supported regional security, including the support for the peaceful birth of South Sudan, the African Union Mission in Somalia, and working with regional partners to counter the predatory Lord's Resistance Army. We continue to promote regional stability and security because it is the right thing to do and because it is an essential element for continued growth.

The administration has heavily invested in development partnerships that promote food security, increase resilience to climate change, and empower communities that are responding to HIV/AIDS, malaria, and other health threats. We continue to lead major efforts like the New Alliance for Food Security and Nutrition, which aims to lift 50 million Africans out of poverty in the next decade.

And, finally, under President Obama's leadership, the United States has been the world's leader in responding to humanitarian crises-such as the famine in the Horn of Africa.

Despite all of these successes, Africa's dynamic growth and its increasing strategic importance demand that we deepen our engagement even more.

Sub-Saharan Africa, in particular, is experiencing rapid change. Internet and mobile technologies are dramatically shifting the way business is done-even while population expansion, political instability, and other challenges threaten the positive progress that many nations are making. But economic progress is clearly visible-private investments in Sub-Saharan Africa now exceed direct aid, thereby fostering long-term stability in both large and small countries.

This is our moment to work together to ensure that we both secure Africa's gains-and build on them. And I believe strongly that one of the ways we can do that is for U.S. businesses to invest in Africa, and to believe-like we all do here-in Africa's bright future.

That's why the president's Strategy to spur economic growth, trade and investment in Sub-Saharan Africa is crucial. Through it we want to support a business climate that enables and promotes trade and investment. We want to support efforts to better integrate Africa's markets, allowing them to compete more effectively and transparently. We want to support African companies' ability to access global markets and tap global supply chains. And, woven throughout these efforts, we want to promote Africa as a key destination for American investment and trade.

The good news is, the U.S. commercial and economic relationship with Sub-Saharan Africa has already begun to blossom. Two efforts are particularly praiseworthy in this regard.

First, the African Growth and Opportunity Act-AGOA-continues to support the flow of African goods to the U.S. More than ever before, American businesses and consumers are buying African products such as flowers, fruits, nuts, cocoa, footwear, and wine. Importantly, nonpetroleum exports under AGOA have tripled to nearly $5 billion. Compared to a decade ago, more than twice the number of eligible countries are shipping non-commodity goods under AGOA.

We are building on this by connecting even more African businesses-including small businesses-to global markets and supply chains. For example, the Commerce Department recently worked with X-Chem-a black, woman-owned AGOA exporter-to link her into the Walmart/Massmart supply chain. I believe Angela is here today.

And I was thrilled to see that three months ago, President Obama signed into law the renewal of the third-country fabric provision. This will ensure that we can continue to support apparel manufacturing in less-developed Sub-Saharan countries. This is especially helpful to women, who hold about 90 percent of these jobs.

Looking forward, the administration will work with Congress to ensure that AGOA is renewed in 2015.

A second example of how commercial ties are already blossoming is President Obama's National Export Initiative-an effort led by the Commerce Department.

President Obama set the goal of doubling U.S. exports from 2009 to 2014. As we know, the consumer class in Africa and throughout the world is growing, and demand for Made-in-America products has never been greater.

Right now, this Initiative is focusing on countries that are known to be stable, fast-growing markets, with significant commercial opportunities. South Africa, not surprisingly, is one of those. That's why we are: increasing the number of trade missions, focusing our advocacy efforts on markets like this one, expanding our lending activities, and bolstering our overall engagement on trade policy.

As a whole-due to our efforts under AGOA, the National Export Initiative, and more-the U.S. and Sub-Saharan Africa reached $95 billion in two-way trade last year, an increase of 16 percent from 2010.

However, U.S. trade with Sub-Saharan Africa accounts for only 2.6 percent of U.S. total trade with the world. So, we are still far from reaching the full potential of U.S.-African trade - as well as investment. We can and must do more.

As Africa's wealth increases, so does its demand for improved transportation, telecommunications, housing, energy, consumer goods, financial services, healthcare and more. American companies are poised to bring their entrepreneurial spirit, their expertise, and their know-how, to help meet that demand.

For all these reasons, I am thrilled today to announce the launch of the Doing Business in Africa Campaign.

And I'm pleased to be bringing a message from President Obama himself. He writes the following:

"Sub-Saharan Africa is a region of extraordinary opportunity for growth and economic development. That is why this June, I issued the U.S. Strategy Toward Sub-Saharan Africa, a plan aimed at strengthening democratic institutions; spurring economic growth, trade, and investment; advancing peace and security; and promoting opportunity and development in the region.

"To advance the goals of this strategy, and to deepen trade and investment between the United States and the nations of Sub-Saharan Africa, I am pleased to support the Department of Commerce's "Doing Business in Africa" (DBIA) campaign.

"The economies of sub-Saharan Africa are among the world's fastest growing, and this economic expansion--partly a result of our long-standing investment in Africa--provides an opportunity to lift millions out of poverty and foster long-term stability. Our challenge is to ensure these gains continue and spread, and to enable American companies and the African Diaspora to obtain the support they need to take advantage of these new trade and investment opportunities.

"Many American entrepreneurs and business leaders are unaware of the tremendous trade and investment prospects in sub-Saharan Africa or face challenges establishing business relationships in the region. The DBIA campaign seeks to change this by increasing awareness about key sectors and markets in Sub-Saharan Africa and opportunities to expand trade activities. The initiative promotes enhanced financing opportunities to bolster American exports and provides trade counseling and advocacy for entrepreneurs who want to tap into these growing and dynamic markets. The strategy also aims to further engage the African Diaspora community living in the United States to improve our commercial and economic ties with sub-Saharan Africa.

"Through the DBIA campaign, we are responding to the emergence of African regional economic communities, and working with our partners to deepen integration, reduce barriers to trade and investment, and support existing and new investments by American businesses. By doing so, we continue the work of creating jobs and expanding economic opportunity that will help drive our economy and support the growth of our African trading partners."

I am pleased to share just a few of the many efforts that we are immediately undertaking as part of this new campaign.

First, the Commerce Department has a powerful network of U.S.-based Export Assistance Centers as well as Commercial Service Officers in strategic embassies around the world. Through this campaign, we are going to train these counselors on how to help businesses start or expand their exports to Africa. Importantly, we will also ensure that these counselors have timely information about new opportunities that are arising on this Continent.

Second, we will place a special focus on empowering the African Diaspora in the United States-one of the world's largest. We know there is significant untapped potential for commercial interaction in these communities. We plan to reach out to the businesses in this community, making sure they not only know about opportunities... but that they can also find the tools they need to trade and invest in Africa.

Third, we will work with organizations such as CCA and the Business Council for International Understanding to launch a series of Africa Global Business Summits in the U.S. in 2013. These Summits will bring U.S. Ambassadors and commercial service officers from Sub-Saharan Africa back to the U.S. to share strategies and tips with entrepreneurs and business owners to help them successfully enter key markets.

Fourth, for the first time ever, we will partner with the State International Development Organization to train economic development leaders at the state and regional levels in the U.S., with a special focus on the opportunities and possibilities for doing business in Africa.

And fifth, we will bring business leaders to visit each others' countries and find new opportunities, because more than anything else, mutual economic growth is dependent on person-to-person relationships. For example, I'm happy to know that next week, the U.S. Ambassador to Nigeria, Terrence McCulley, will lead a Nigerian business delegation to a number of U.S. cities to see some of our biggest trade shows.

And here in this room, I am delighted to note that person-to-person connections are being made today. As part of a trade mission led by Undersecretary Sánchez, we have brought a diverse group of both small and large U.S. firms to Zambia and now to South Africa. These companies have traveled here because they have rightly discarded the old and false perceptions about Africa. They understand that the commercial opportunities in Africa are too compelling to ignore-and they want to help the Continent grow and thrive.

There are over a dozen on this mission, ranging from a Midwest-based agricultural and construction equipment manufacturer, to a Florida-based well-water treatment company, to a California company that integrates GPS and laser technologies with application software and wireless communications.

Could all of the companies that are on this mission stand and be recognized? I hope your conversations here in Africa are fruitful.

I have one final announcement to make as part of the Doing Business in Africa campaign-and it's related to the important area of financing.

I am traveling today with leaders from the Overseas Private Investment Corporation, the U.S. Export-Import Bank, and the U.S. Trade and Development Agency. Each of these agencies has dramatically increased their investments and activities in Africa in recent years.

In the past four years, OPIC has committed more than $2 billion in financing, insurance, private equity, and other support to Sub-Saharan Africa. In the past year alone, Ex-Im Bank supported $1.4 billion in authorized transactions with Sub-Saharan Africa. And USTDA has conducted studies, workshops, and reverse trade missions, while also supporting over $1 billion in U.S. exports in partnership with African project sponsors.

So thank you for all that these agencies are doing here in the region.

All of us here know that having energy in people's homes and businesses is crucial to development. We also know that Africa has abundant clean energy resources just waiting to be harnessed.

Notably, the South African government has made extraordinary progress in this regard. It has increased access to electricity from 15 percent of the population to about 85 percent today, making it a leader in Sub-Saharan Africa. Yet there is more to be done both here and throughout the region.

Here's our key challenge. One of the main obstacles to accelerating clean energy investment in Africa is an inability to fund project development costs. Even projects that have clear potential for broad impact and strong financial returns to investors often fail to secure financing.

So, as part of the Doing Business in Africa campaign, I'm pleased to announce today that the Obama administration will work through these agencies-OPIC, USTDA, and Ex-Im-to establish the new U.S.-Africa Clean Energy Development and Finance Center.

The Center will operate out of the U.S. Consulate General here in Johannesburg. Its mandate is two-fold: to help implement clean energy projects in Sub-Saharan Africa, and to promote U.S. private-sector participation as this sector continues to grow.

Specifically, the Center will provide technical and financial support for projects related to solar, wind, biomass, geothermal, hydro, ocean and natural gas.

Starting in March, Peter Ballinger will be spearheading this effort as OPIC's representative in Africa-working side-by-side with Larry Farris as well as Jason Nagy of USTDA, also here today. And I should note that Peter will be the only OPIC employee not based in the United States. Congratulations Peter, and thank you all in advance for the work you will be doing.

So, the Doing Business in Africa campaign starts now. We have no time to waste.

In fact, this afternoon I will be meeting with the U.S. Chiefs of Mission stationed in several countries: including Ambassadors Gips of South Africa, Cretz of Ghana, Gavin of Botswana as well as Deputy Chief Fox of Lesotho. They are here today, and I want to thank them for serving as crucial partners and advocates for this campaign.

In the coming days, months, and years, even more administration officials will be working and traveling to raise the visibility both of this campaign and of the U.S. Strategy overall.

I, myself, will be going to Nairobi tomorrow for the East African Community's annual heads of state summit. We will be working with the EAC-among other things-to establish a regional investment treaty, to provide trade-capacity building assistance, to build a more open and predictable business climate, and to launch the EAC-U.S. Commercial Dialogue-America's first Commercial Dialogue in Africa.

Overall, we must continue to find new ways for both business and government leaders throughout the U.S. and Africa to form powerful linkages that lead us all to greater prosperity.

And as I look around this room, I am confident of what we can achieve-together. It is significant that we are launching the Doing Business in Africa Campaign here in South Africa with all of you-in a country where U.S. companies have strong ties, as evidenced by those represented here. This nation has grown and diversified its economy and it serves as a crucial gateway to the rest of Sub-Saharan Africa.

You have already paved the way for the success and prosperity of businesses, workers, and citizens on both sides of the Atlantic.

And yes, as our new campaign confirms, U.S. firms are excited to be doing business throughout Africa from the Kentucky-based, water pump company now working with a South-African distributor to help small towns curb pollution, to major U.S. firms like GE which is supplying Kenya Airways with 20 jet engines for their new planes.

We want more stories like those.

Let me close with a quote from Nelson Mandela. Mandela once said: "After climbing a great hill, one only finds that there are many more hills to climb."

The U.S. and Africa have reached a wonderful moment-a moment where we are working with each other, learning from each other, and building on each other's prosperity-every single day.

As commerce flourishes between us and as our nations become more intertwined economically, it feels as though we have indeed reached the summit of a great hill.

Now, let us press on. Let us continue our journey together. And let us ensure that the United States is a strong partner in the rising prosperity of Africa in the 21st century.

Video: Larry Seruma Sees Africa Becoming The Export Destination

The CIO of Nile Capital Management explains why investors are starting to 'get the African story.'

Video



Mike Norman, Hard Assets Investor (Norman): Hello everybody; welcome to HardAssetsInvestor.com. I'm Mike Norman, your host. Today we will be talking about investment opportunities on the continent of Africa. My guest is Larry Seruma, the chief investment officer and managing principal at Nile Capital Management. Larry, thanks very much for coming on the program.

Larry Seruma, CIO, managing principal; Nile Capital Management (Seruma): Thank you for inviting me.

Norman: So your fund focuses exclusively on the continent of Africa. Why don't you tell us a little bit about it and how you go about selecting investments there, what countries, etc.

Seruma: Yes. Our fund exclusively invests in the continent of Africa. We invest from Cairo to Cape Town. We are value investors. But we invest in all sectors. And we invest across the entire continent, meaning that we could invest in countries in the middle part, like Kenya, to the bigger countries, like South Africa, in terms of market capitalization.

Norman: Now your fund is a mutual fund, correct?

Seruma: That's right.

Norman: So you're actually buying shares in companies. And these are African companies domiciled over there, doing business in these various countries. How do you go about the stock selection process?

Seruma: We buy locally traded stocks. Or we buy or we own locally traded shares. And we buy companies we consider to be African stocks which would generate more than 51 percent of their revenue from the African continent. We are value investors. So our approach is to look at the fundamentals and look at the stocks, how they are priced, what the true fundamental value is. And that is really the overriding factor, how we end up owning any one company that ends up in a portfolio.

Norman: From a values standpoint, are there any particular countries that stand out right now, as excellent values?

Seruma: Yes. Nigeria does stand out as an excellent value proposition, both from a historical perspective and from a relative standpoint. If you compare Nigeria banks to, say, other emerging market banks, you see Nigerian banks are relatively valued well to these other banks.

Norman: Now, when we think about Nigeria, I think most people would think oil, right? And you're talking about the financial sector in that country.

Seruma: Right. Nigeria has about 3 percent of global reserves for oil. So the economy has a high sensitivity to oil. But also, Nigeria has 160 million people. So banking as a business has a higher potential in terms of servicing that population. So banks present a good investment opportunity in Nigeria.

Norman: Historically, though, hasn't the Africa theme really been about commodities and natural resources? And do you see that changing, now, more into just personal consumption over there—maybe the financial sector—as you were mentioning, consumer goods, infrastructure?

Seruma: Yes. Historically, Africa has been known for its natural resources. It has 50 percent of all global strategic reserves for resources. But what has happened over the last 20 years, as resources have gone up in price, is that many African countries have earned revenue from exporting resources. They are investing in infrastructure and they have increased the consumption of their middle class. So the middle class is growing on the continent. And as a result, you are seeing more consumption for consumer-related stocks.





Norman: What about political risk? We can't talk about Africa unless we talk about political risk, which has really been sort of the deal-killer in the past. Every time we got an increase in interest in Africa as an investment theme, you've had coups, you have had revolutions. How does the landscape look, in terms of political risk now?

Seruma: Africa is a very diverse continent, and a very large continent. You are talking about 54 countries. So, typically, when something happens in any one country, it's very easy to associate that with the entire continent. Say, for example, events in Egypt—more recently, events in Libya—could be construed to be the entire continent.

But there are many other countries in Africa that are politically stable. They have gone through elections in which they have changed government. A good example is Nigeria. Nigeria, 30 years ago, used to be governed by one coup after another. But over the last 25 years, we have seen succession through elections. So there are many other areas on the continent that are politically stable.

Norman: If Africa is an economically sensitive story—it's tied in with the global economy—wouldn't it just be easier for an investor to play some big cyclical stock, or some index that is economically sensitive? Why go to Africa?

Seruma: It is true that, in the whole world, Africa is not isolated from events that happen globally. However, if you look at Africa, the dynamics that make it grow are much more domestic. For example, domestic consumption is much more driven by internal dynamics. Africa does not export as much as places like China. So you find the growth is being driven by the things that are being done domestically.

If you look at Africa's financial banking system, African banks are not as connected to the entire global financial system. So you find they are insulated from shocks that happen in the financial system. So a lot of that has insulated Africa from some of the big macro events that really tie up or make the world much more connected.

Norman: You mentioned China. China obviously has been a major investor in Africa. What about the United States? What about Europe? Where do they stand, in terms of large companies here, for example, getting involved in Africa?

Seruma: Globally, China has been very important to Africa. China trade in Africa was about $5 billion in 2000. In 2011, it was about $170 billion. But all other countries are taking note of what is going on in Africa. Europe, the U.S., even places like Korea are looking to invest more into Africa than ever before. Part of the reason is driven by the fact that developed markets are experiencing low growth. And they are looking at alternatives for where they could export in terms of generating growth domestically. And Africa is becoming the destination to go to.

Norman: How has your fund performed relative to some of the major market indices?

Seruma: According to Morningstar, our fund is kindly ranked as No. 1 in terms of percentile rank, compared to the diversified emerging markets. So we are pretty much of the view that investors are beginning to get the African story, how robust it is. And they are beginning to recognize that growth and returns, at least for the foreseeable future, are likely to be more robust and coming from Africa than any other place in the world.

Norman: So when you say the're beginning to get the story ... Africa always seems like a very compelling story. But you kind of sound like you're saying they believe it this time. They are really getting involved this time.

Seruma: Right. This time, they are really getting that. They are getting it for three main fundamental reasons. No. 1, commodity prices are projected to stay at a high level for a long period of time. No. 2, developed markets are printing money. Developed markets have low growth. And developed markets are embarking on programs like QE3. What that really means is that capital flows are going to flow to Africa in a way they have never done before. So that is very sustainable. And I think it is very powerful going forward.

The third reason is the returns. You get higher risk-adjusted returns in Africa relative to developed markets. And those three forces will be sufficient to turn investors to invest in Africa.

Norman: Sounds like a very bullish story. And it sounds like this time we may actually see this play out over a longer period of time. And I really thank you for coming on the show. It's been fascinating.

Seruma: Thank you for having.

Norman: Thank you very much. That's it for now, folks. This is Mike Norman, saying bye-bye. We'll see you next time.

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Africa: Emerging or Diverging? a Framework for Discussing 'Africa Rising'

ANALYSIS

I wonder if we should perhaps think of sub-Saharan Africa as a collection not so much of jointly emerging markets, but of diverging ones.

Last week I was privileged, under the umbrella of the commendable 'Invest in Africa' initiative, to join experienced businesspeople in London discussing endemic inaccurate negative perceptions by outsiders of the relative risk of doing business in African countries.

The curiosity is that longstanding, ingrained negative perceptions persist now alongside a more recent, contrary trend - the more hyperbolic proponents of which claim that anyone not rushing to invest in Africa must need their head examined.

There is perhaps no better theme for a contemporary African Argument - for those following business issues as well as (often related) developmental or political ones - than efforts to unpack and understand this 'Africa Rising' narrative. Simon Freemantle's recent post here is an excellent addition.

It develops an argument he delivered with typical cool conviction at a recent Joburg event where we reflected on the proposition 'Africa: New Hope or New Hype?' hosted by Ernst & Young's Michael Lalor.

There are many dimensions to getting behind simple binary characterisations of either 'Africa rising: all is great' or 'Nothing new here: it's a false dawn'. Each time one goes (as we constantly must) behind the headline rates of growth, one sees the complexity - both the exaggeration about transformative progress, and the under-reporting (or misreporting) of the many positive achievements and trends.

In the spirit of a blog as somewhere to think aloud, here is a rough framework - contrived to spell 'AFRICA' - for some issues I see in the 'Africa Rising' debate.

'A' is for Absolutes:

A sound framework must absolutely avoid absolutes. It can seek indicative steers but should eschew absurd reductions, like the recent Economist editorial ('South Africa going down, rest of Africa going up' - an approach I criticised on this site before that piece).

One constantly encounters these binary characterisations ('Ghana all good; Benin all bad'). They are pictures with little practical utility. There is a 'rising' story to tell, but boringly it is a mixed one. Freemantle refers to this, noting that the African glass is to be seen as neither half full nor half empty.

'A' also stands for two things we must always distinguish: mere advocacy about Africa's attractiveness, and good analysis thereof. Even if one's objective is African upliftment, improved investor sentiment is best achieved in the long term by objective, rational analysis.

In so many cases, such exercises point in favour of the continent relative to Russia-CIS, Latin America, India or other settings. But in their efforts to dismantle past stereotypes, real Afro-optimists have a duty to avoid selective storytelling that omits the significant problems investors do and will encounter.

'F' is for Financing

Vital to Africa's rise - and to assessing honestly its sustainability and spread - is the money for it. I do not mean yet more excitable chattering about mobile banking (transferring money and saving it are not the same thing, for one).

I mean assessing the depth of local markets, greater access to finance for SMEs and start-ups, less prohibitive interest rates, agricultural lending, financial literacy. I mean household savings rates without which, among other things, talk of a future demographic dividend is cheap. I mean whether well-off Nigerians are re-investing in Nigeria - not just in Notting Hill; I mean whether private funding (not development or policy banks) will ever comprise the bulk of major African project finance.

An important dimension of this is the cost, in markets like London, of financing and insurance for African ventures. Here the 'Invest in Africa' initiative has an important role to play in explaining to underwriters (and the like) why risk ratings for Zimbabwe should not be so many times worse than those for Argentina.

Those who swoon at Brazil and drum for India (but find it fashionable now to mock South Africa) should compare Pretoria's project management for the Soccer World Cup with the other BRICS countries' Olympic and Commonwealth Games preparations respectively. The other 'F' is thus for 'Facts'.

'R' is for Resources

In slaying the myth that all African growth is about the extractive industries (Nigeria's non-oil economy is the fast-growing part), we risk creating another myth: that it is now all just about the African middle class spender. Resources are still a major reason for Africa's attractiveness, for infrastructure-building, and indeed for why a decade of high growth has probably not resulted in net private sector job-creation.

Africa's fortunes still relate strongly to natural resources exports - boring, but true. 'R' is also for revenue transparency; redistribution; for reformed bureaucracies and reduced risk perception; for responsible investing and responsive governments: all of which African businesspeople would like this Christmas.

'I' is for Inequality

'I' could be for infrastructure, but that states the obvious. Instead the 'I' in this Africa is for various kinds of inequality: take the mindset inequality that leads to inappropriate risk rankings for the many African countries that are easier and less corrupt to invest in than the Russias or Indias of this world.

Diversity, variety: Africa's hallmark, and with both positive and negative aspects. But I also mean inequality of the structural, insidious sort that feeds instability and inescapable poverty. The rising does not necessarily moderate this - and may even exacerbate it. South Africa's recent census showed widening gaps between its provinces on many social and other indicators. We see this pattern across Africa Rising: widening gaps between places and peoples; fast-growing equality gaps between fellow citizens.

'Unemployment' and 'unmet expectations' do not begin with 'I', but 'Individuals' does. When enough younger 'I's' see themselves as a 'We', mass popular forces can become political risk. Across and within African countries is a differentiated trend: some countries, cities, sectors, or classes of citizen are on the up, but others are at risk of slipping further behind. Freemantle rightly makes a similar point. But the Africa Rising narrative often glosses over indications of the continent's diverging markets.

'C' is for Consumers

I have mentioned the African middle class - a staple of Africa Rising that at once reflects reality yet obscures all sorts of definitional distortions and inconvenient truths. The other 'C' of course is for citizens, whose growing demand that leaders serve them (not vice versa) is one of the irrefutable, albeit still very incomplete, aspects of Africa Rising.

Yet in many settings the middle (consumer) class is reluctant to challenge a political status quo that gives inadequate attention to the aspirations and deprivations of poorer communities. Alongside consumers one must mention the 'C' of cities - for so many investors, Africa strategy is about Lagos, not Nigeria; about Addis, not Ethiopia; about Abidjan, not Cote d'Ivoire. The corruption 'C' in its many guises is still part of Africa Rising - although other continents are hardly free of it.

'A' is for Accuracy

Africa Rising debate suffers somewhat from a data deficit. Things may be better, or much worse, than we are told. What do we know (or reliably know) about many African treasuries and markets? Ernst & Young's new 'Africa By Numbers' report is an example of attempts to bring a more fact-based approach to Africa analysis, often surprising outsiders on the upside.

Invest in Africa also seeks to alter perceptions without distorting the data. Finally, the obvious other 'A' is for Africans themselves (lest we think in terms once of scrambling for Africa, then saving it, and now finding yield in its rise). If Africa is rising, it is because Africans are part of this; if it is to rise further and more fully, inclusive investment in its people will be crucial; but where it is stagnating or being suppressed, it is also Africans who must offer the solutions.

My argument supports Freemantle's, and begs a rejoinder from others - the more the merrier in promoting a richer understanding of the macro-trends of doing business in Africa.

Jolyon Ford leads Oxford Analytica's sub-Saharan Africa practice.

Q&A: Marlon Chigwende - Carlyle Africa

Marlon Chigwende, Carlyle’s co-head for Africa, speaks to Private Equity Africa about the firm’s strategy to apply its global expertise to the local African setting.


What is the story behind Carlyle setting up an African strategy?

The Carlyle story in Africa is a story of growth. Over the past 10 years, sub-Saharan Africa (SSA) has grown on average about 6% per annum in terms of real gross domestic product (GDP). Only India and China have grown faster during that period.

We believe that this progress is here to stay, and the quality of the current growth supports this notion. If you look at the 6% historic growth, about two thirds of that has come from internal domestic consumption, driven by the rising middle class. The other third has been driven by rising commodity prices.


What are the advantages of having a global footprint, when it comes to implementing your African strategy?

The global footprint allows us to see what is happening in other markets and apply it to local situations. This means we can not only tap into the developed market expertise, but we can link this with knowledge acquired in other emerging markets that offer similar dynamics, growth characteristics and challenges.

The Carlyle model is one of localisation, because private equity is a local business. We have more than 30 offices around the world, as we strongly believe that you need to be on the ground in the individual markets to fully understand what is going on.

We bring global expertise to the African situation. It is still an African strategy, adapted to suit what is happening on the ground.

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How China is Remaking Africa’s Mining Sector

Last week, China once again caught mining investors’ attention when news broke that the country’s biggest goldproducer, state-owned China National Gold, may bid on Barrick Gold’s (NYSE:ABX,TSX:ABX) 74 percent stake in African Barrick Gold (LSE:ABG).

African Barrick is Tanzania’s largest gold producer. A deal to buy the company in full would cost China National about US$3.8 billion. The move would also nearly double China National’s production. Last year, the companymined 1 million ounces of the yellow metal compared to the 688,000 ounces mined by African Barrick.

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Rising wealth, state involvement are fueling China’s African mining investments

The potential deal highlights two big factors that are driving China’s growing investments in African mining: the country’s exploding wealth and its frequent use of state-sponsored investments to make acquisitions. China is already the world’s leading gold producer, with about 360 tonnes of output in 2011. But domestic demand keeps rising, thanks to strong sales of jewelry and more Chinese investors using gold as a hedge against inflation. As a result, China consumed 800 tonnes of gold in 2011.

For Barrick, a deal could mean unloading an underperforming asset at an attractive price. According to the company’s second quarter earnings report, African Barrick’s costs continue to rise due to higher power rates and lower grades at its Buzwagi mine.

“Discussions are at an early stage, and there can be no certainty that these discussions will result in the acquisition,” said Barrick Gold in an August 16 statement.

If a deal is completed, African Barrick will be the latest addition to China’s surging investment in Africa’s mining industry; last year, it reached $15.6 billion, with seven projects worth more than $1 billion each. The total amount is up tenfold from 2010, according to the China Mining Association.

China is building on its long-standing trade relationship with Africa

The reason behind China’s rising interest in Africa’s resources is obvious: the country needs to secure a steady supply of commodities to fuel its rapid growth. This year, China’s economy is forecast to expand at a rate of 7.7 percent, Deutsche Bank reported. That’s down from last year’s9.2 percent rate, but it’s still very high by global standards.

China became Africa’s largest trading partner in 2009. According to the Chinese Ministry of Commerce, trade between China and Africa climbed to $126.9 billion in 2010. China also relies on African nations for one-third of its imported crude oil.

Further, the country has built a lot of good will in Africa because it has made huge investments in infrastructure, including power lines and roads. In addition, these projects typically come with no strings attached. That’s unlike many Western countries, which tend to tie their investments to human rights and other political goals.

Controversy has dogged China’s Zambian projects

One of the biggest recipients of Chinese mining investment is the African nation of Zambia, particularly the country’s copper mines, which are a huge contributor to its overall economy: the metal accounts for 75 percent of Zambia’s total exports and two-thirds of the central government’s revenue.

So far, China’s mining firms have invested $1 billion in Zambia’s copper sector. That has helped the country boost its copper production and create jobs. But it’s not all a good-news story. In late 2011, Human Rights Watch issued a scathing report on Zambia’s copper industry that accused Chinese firms of a number of abuses, including forcing workers to work 12- to 18-hour shifts (Zambian law limits shifts to eight hours) and endangering miners’ health and safety by failing to replace damaged equipment and providing inadequate ventilation underground.

Allegations like these are raising concerns that China is simply exporting its weak domestic labor practices abroad. In a November 2011 article in The Guardian, Daniel Bekele, Human Rights Watch’s Africa director, said, “Many of the poor health and safety practices we found in Zambia’s Chinese-run mines look strikingly similar to abuses we see in China. Respecting labour laws and ensuring workers’ safety should be standard operating practice both in China and abroad, not treated as an irritating barrier to greater profits.”

Meanwhile, earlier this month, workers at the country’s Collum coal mine killed a Chinese supervisor in a dispute over wages. The miners were reportedly demanding that the mine’s Chinese owner increase their pay in line with the new minimum wage passed by the government in July.

Increased competition puts the heat on Western miners

So where does all this activity leave other mining companies operating in Africa? In a tough spot, according to a just-released report from National Bank Financial analysts Pierre Fournier and Michael Fini. That’s partly because state-backed Chinese companies have the financial muscle to outbid other miners for attractive properties.

In the report, Fournier and Fini write, “This poses a serious medium to long-term risk for miners with African-focused growth plans, as they will be hard-pressed to successfully compete with politically connected and capital-flush Chinese firms.”

In addition, China’s efforts to curry favor with all manner of African regimes could leave Western miners out in the cold, particularly in more corrupt countries. An extreme example of that occurred in 2007, when the government of the Democratic Republic of the Congo seized two mining permits held by Toronto-listed Katanga Mining (TSX:KAT) and handed them over to Sicomines Company, a joint venture partly owned by a Chinese firm.

Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.

Resource Nationalism In Africa: What It Means For Governments, Companies And Communities – By Jolyon Ford At Oxford Analytica.

Today is The Times’ much-anticipated CEO Summit Africa with one of the more intriguing panels focusing on resource nationalism: opportunity or threat? Both the Indonesian government’s recent efforts to set out a timeframe for foreign mining divestment, and the developing clarity in South Africa’s ongoing debate on the state’s role in mining, show that there continues to be considerable focus around the world on sovereigns seeking a greater share of extractive sector activity.
Is it possible (as at least one analysis firm attempts) to rank extractive sector jurisdictions in terms of the relative strength of local ‘resource nationalism’ forces? There is often good reason to doubt the commercial utility of comparative country risk rankings, or at least to closely scrutinise the assumptions and methodologies used in compiling them.
It may be more useful to track drivers or triggers for government actions on resource revenue issues in each setting than to try to compare jurisdictions. ‘Resource nationalism’ is a global phenomenon partly reflecting the commodities ‘supercycle’, but also one with very discrete wrinkles particular to individual sectors and countries. Take Ghana’s decision late last year to revisit fiscal arrangements in the mining sector. The move partly reflects the government’s response, like others on the continent, to global demand/price factors. Indeed, the IMF advised Accra to consider raising its mining tax levels. However, the move is also closely-connected to the role that mining revenue possibilities have come to play in Ghana’s upcoming (and tightly-contested) election later this year.
One exercise might be to narrow the range of possible scenarios by categorising the upper and lower limits of how resource nationalism demands or responses might manifest. That is, to ask what model may be registering uptake in more than one jurisdiction? Nader Mousavizadeh is moderating the CEO Summit ‘resource nationalism’ panel. One of the questions sent by organisers to panel members ahead of the conference was whether it is possible to identify existing or emerging ‘best’ and ‘worst’ practice in the ways states are manifesting ‘resource nationalism’.
The question might, however, be considered misconceived – things differ so markedly between various mineral and metal commodity sectors it often makes no sense to talk of ‘the extractive sector’. Geography (and other factors) mean that there are considerable differences between what any two nominally competing supply countries could each ‘get away with’ in increasing royalties, taxes, or local participation requirements. Still, global and diversified miners in particular are searching for a workable and durable-yet-flexible model as they try to navigate the resource nationalism phenomenon.
Can any of the components of the recent offer to Zimbabwean government ministers by Impala Platinum subsidiary Zimplats offer any insights? The offer involved transferring 10 percent of Zimplats’ shares to an employees’ trust fund, and 10 percent to a local community trust – the transfer to be financed over time by dividends from the shares themselves. In addition, there appears to be an in-principle agreement to transfer a further 31 percent of shares to a national economic empowerment fund (comprising the 51 percent of corporate indigenisation demanded by ZANU-PF ministers,) although it remains unclear how the government would pay for this share.
These issues are almost certainly not fully resolved. They are in large part inseparable not only from current platinum price buoyancy, but also from the Zimbabwe context, and especially the role of foreign capital in contemporary political dynamics there. Despite the limits inherent in drawing wider lessons from Zimbabwe’s platinum sector, parts of the ‘deal’ may conceivably be useful in seeking to estimate the high-water mark of mining firm concessions to sovereigns during the current resource nationalism phenomenon.
Not all assertive sovereigns are responding to populist pressures, or are democratically accountable. Even so, the emphasis on local communities is not surprising. Recent events from Tanzania to Peru to South Africa point to an issue somewhat connected to ‘resource nationalism’. It is one where there is considerable potential both for contestation with local communities and for innovation by governments and firms to mitigate such risks: the relationships between artisanal miners and big firms operating in the same general vicinity.
There are important distinctions to be drawn between informal miners holding permits and illegal mining – often conducted by criminal syndicates, and involving considerable environmental and safety risks. The recent rockfall deaths of illegal miners at the (already-controversial) Grootvlei complex in South Arica highlights problems for regulators, but also issues for firms in what strategies they have for engaging local non-labour communities. The more thoughtful firms are not waiting for local regulators, and in settings like Liberia, much of the innovation in workable arrangements with artisanal communities can be expected to come from firms, not governments. Anticipating issues and offering fair outcomes may work at both the micro (community engagement) and macro (revenue policy) levels, depending on the setting.
Jolyon Ford is a senior analyst at Oxford Analytica, the global analysis and advisory firm. Oxford Analytica has provided the briefing book for the Times CEO Summit at the Savoy Hotel, London, on March 19.

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Zimbabwe mining: mixed messages and wishful thinking

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://blogs.ft.com/beyond-brics/2012/11/20/zimbabwe-mining-mixed-messages-and-wishful-thinking/#ixzz2CnmWyro8

Ever since the Zimbabwe government published its plans to localise majority ownership of the country’s mines, mixed messages have dominated the debate over investment and growth.

Last week was no different, with the finance minster, Tendai Biti, and miner Amplats making positive noises about investment which seem rather optimistic, to put it mildly.

Presenting his 2013 budget last week, Biti quoted a World Bank study on the mining industry in Zimbabwe, and predicted a five-fold increase in gold production by 2018, along the tripling of ferrochrome output, increases of 72 per cent in diamonds, 50 per cent in platinum and a nine-fold surge in coal production. According to the Bank study this, allied with expansion in the iron ore and nickel sectors, will cost over $9.6bn in fresh investment – or 85 per cent of Zimbabwe’s current GDP.

Shortly after Biti’s presentation, South African platinum mining group Amplats, which earlier this month agreed to sell 51 per cent of the shares in its Unki platinum mine to Zimbabwe investors in compliance with the country’s Indigenization and Economic Empowerment law, revealed that it was considering a $400m investment in a second platinum mine in Zimbabwe.
Colin Chibafa, chief financial officer of Amplats Zimbabwe, said: “We are expanding various options to expand production, including building a new mine that could cost up to $400m” and which could possibly double production from the 2012 level of 65,000 ounces.

This comment ranks high on the mixed message index, coming just weeks after Amplats sold control of its existing mine property, Unki, to Zimbabwean investors. “Selling” is something of a misnomer since Angloplat shareholders, despite facing intense pressure from falling output and industrial unrest in South Africa and weak metal prices internationally, will ultimately finance the purchase. Ten per cent of the shares will go to the Unki workforce, 10 per cent to a community trust, 10 per cent to local unnamed investors and the balance of 21 per cent to the government’s National Indigenization and Economic Empowerment Board. Since none of these “buyers” can pay, Amplats is to provide a 10-year loan which will be repaid from dividends earned by Unki.

It comes as a surprise then that Amplats should be seriously considering a major new investment in Zimbabwe at a time when it will still be trying – with no certainty – to get its money for the Unki sale and when Amplats top management is undertaking a review of its strategy. It is also difficult to understand why Amplats shareholders should be willing to invest a further $400m in Zimbabwe, providing 100 per cent of the capital, to get 49 per cent of the profit.

The idea that the mooted investment is a way of growing output outside South Africa and its mining problems also takes a leap of faith. Cross-border contagion is as likely in southern Africa as in the eurozone. Why should Zimbabwe escape the kind of labour unrest that has crippled South Africa mineral production given that poverty and unemployment levels are far higher?

On the government side, the deep divide on investment policy is once again illustrated in the latest public spat between Biti and Indigenisation minister, Saviour Kasukuwere. In his budget speech Biti called for changes to the indigenisation law to foster foreign investment. Kasukuwere was quick to respond, insisting that the act would not be changed. Since some companies have already complied, he said, it would be unfair to penalise them by allowing newcomers and those who are resisting the law, to enjoy more favourable terms.
In the light of this background, the target of almost $10bn in new mining sector investment alone over the next five years looks hugely optimistic. It is certainly not an impossible dream, since a change of government in Harare and the revival of the commodity price super cycle might just create the conditions for such an investment boom. But on current trends, that seems unlikely.

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The Case for Investing in Africa - Peter C. Thoms, CFA Founder, Africa Capital Group

By Peter C. Thoms, CFA
Founder, Africa Capital Group
www.africacapitalgroup.com

If recent progress can be sustained, Africa may prove to be one of the next great ground-floor international investment opportunities. Until just recently, however, the continent has remained beyond the consciousness of all but the most adventurous of investors. But now Africa is beginning to gain a wider audience in financial circles. Why? Because it has notched strong growth for the last decade and is likely still in the early stages of a powerful and transforming spurt of economic progress.

The mature economies of the developed world-the U.S., Europe and Japan-must contend with tepid growth, aging populations and painful fiscal retrenchment for years or even decades to come. But Africa is in precisely the opposite position. Having enacted economic and political reforms and shaken off its post-colonial torpor, Africa is on an impressive growth trajectory. The continent's market-based ideals are solidifying, and it is simply a matter of time before its capital markets and economies become more developed, liquid and integrated with the global financial system.

Today the continent-sub-Saharan Africa in particular-features rapid growth, abundant natural resources and a large, young and increasingly educated workforce. Forward-thinking investors have the opportunity to get into Africa now, before the continent makes a one-time-in-history transformation from an impoverished agrarian subsistence economy to a modestly prosperous and more urban consumer-based economy. Nowhere is the adage "the early bird gets the worm" more applicable than in the field of investing. Whether pertaining to a company, country or continent, investors who perceive opportunity before others-and then act decisively on their perceptions-position themselves to be rewarded with higher returns for longer periods.

Africa, admittedly, continues to suffer from a serious image problem. While deserved in certain cases, the outside world's perception of Africa as a place of poverty, hunger and incessant warfare has kept many investors away. The media in the developed world does Africa no favors by focusing intently on its problems and paying minimal attention to its positive developments. But tough image or not, Africa is moving forward. Vibrant entrepreneurship and resourcefulness are in full display in much of Africa as people seek to build better lives for themselves and their families. While this progress may not show up on your nightly newscast, strong economic growth and a lengthening track record of solid equity market returns indicate that things are turning for the better.

The continent's present image creates an opportunity for today's smaller investor. Once the media's focus shifts to the positive change in Africa, institutional investors seeking a durable growth opportunity will come calling and investment bargains will become scarce. Just to note: the cover of The Economist Magazine on December 3, 2011 was entitled "Africa Rising," whereas in May 2000 the same magazine dubbed Africa "the hopeless continent."

Our Investment Thesis

Africa is the most complex continent on earth and defies simple descriptions. It has one billion of the world's seven billion people and 20% of the world's land mass. Behind Asia, it is both the second largest and second most populous continent. It has 54 countries with hundreds of ethnic groups speaking more than one thousand languages. One (mostly) common theme throughout the continent, however, is that the quality of life is improving.

The following themes support our investment thesis for Africa.

1. Africa is growing rapidly
2. Africa has immense natural wealth
3. Africa has favorable demographics (for investors)
4. Technology is accelerating change in Africa
5. Africa is joining the global financial system.

Now let's address these themes one by one.

1. Africa is Growing Rapidly

Around the year 2000, after two decades of tepid to non-existent growth during the post-colonial era, Africa began to stir. For the last decade, Africa has been on a steep trajectory higher. The International Monetary Fund (IMF) estimates that Africa grew at a rate of 6% per annum over the last decade-a rate much faster than the developed world and twice as fast as Africa had been growing for the prior two decades. The IMF now forecasts Africa-wide growth of 5% for 2011 and 6% for 2012 and nine of the top fifteen fastest growing economies in the world are in sub-Saharan Africa.

To be sure, the continent is rising off a very low economic base. But this depressed starting point is an attractive attribute for early investors, as it sets Africa up for what could be years or even decades of rapid expansion. That Africa is growing off a low level is a reason for investors to be encouraged and is in fact a cornerstone of our investment thesis. Investors who focus not on the absolute level of the starting point but rather on the direction and rate of change will find that Africa scores highly on these later measures.

As African economic growth kicked into high gear a decade ago, the continent's equity markets responded. Africa's largest stock market, South Africa's, rose nearly 200% from 2001 to 2010 while U.S. market was essentially flat. Our expectation that Africa will continue to generate attractive returns for investors is thus not predicated on big changes occurring. We merely expect Africa to remain on its present course.

2. Africa has Immense Natural Wealth

Africa has what the world needs. Many Africans are very poor, but the continent itself is incredibly rich in natural resources. It has huge untapped energy resources in the form of oil, natural gas and hydroelectric power. Africa also holds over half of the world's gold reserves, 40% of the world's platinum and 20% of the world's uranium as well as vast deposits of diamonds, iron ore, copper, and cobalt. The true natural wealth of Africa is unknown, however, as less than half of its land has even been surveyed.

On top of its mineral and energy wealth, Africa also has a huge swath of uncultivated arable land. According to the United Nations, only about 10% of Africa's arable land is currently being cultivated and the continent holds more than 60% of the world's uncultivated arable land. Over the next few decades, Africa will likely transition from a net food importer to a net food exporter.

Foreign direct investment (FDI) is pouring into Africa as more developed countries-notably China-seek to gain access to Africa's resources. In 2010 FDI exceeded $55 billion, up 500% from the level a decade earlier. FDI not only brings extra cash into Africa, but also infrastructure development. Better ports, roads, rails and telecommunications systems are sorely needed to support further growth, and FDI is helping.

3. Africa has Favorable Demographics (for investors)

While the populations of the U.S., Japan, Western Europe and China are aging rapidly, Africa's one billion people are mostly young. In sub-Saharan Africa, up to 40% of the population is thought to be under the age of eighteen. The median age in Africa is about 20 versus 30 in Asia and 40 in Europe. Africa is the youngest continent on earth and as this big bulge of population moves into its most productive years it will create huge demand for a wide array of products. Even now companies in Africa are racing to fulfill huge unmet needs across all levels of society.

As societies become more urbanized, their productivity tends to increase. In Africa now, a marked trend of urbanization is propelling growth as new inhabitants of African cities begin to contribute to the economy. Africa's large, inexpensive, and increasingly educated labor force is poised to make a strong contribution to the global economy.

4. Technology is Accelerating Change

Communications and computing technology is acting as an accelerant in Africa; the growth of mobile phones provides an instructive example. The GSM Association, a group of mobile phone operators, announced in November 2011 that Africa is the fastest-growing mobile phone market in the world, having increased its subscribership 20% or more in each of the last five years. African mobile subscribers are expected to reach 735 million by the end of 2012-up from basically zero a decade prior. In 2001, Nigeria, a country of 160 million, had fewer than 500,000 phone lines in the whole country. Now, eleven years later, it has more than 80 million mobile phone subscribers. Africa's rapidly developing communications infrastructure is a boon to business, as it facilitates supply-chain management, demand forecasting and overall operating efficiency.

5. Africa is Joining the Global Financial System

Africa is beginning to integrate with the global financial system. Access for foreign investors, while still difficult, is improving. Friction costs-spreads, custody, and trading costs-are higher in Africa than in developed markets, but these costs will decrease over time as trading volumes build. Financial information about African companies is increasingly available outside of Africa as many companies offer their financial reports online and firms such as Bloomberg and ThomsonReuters begin to carry African trading data on their platforms. Global investors now have online access to corporate and government financial information that until just recently was very difficult and time-consuming to access.

For the moment, however, limited liquidity for many smaller equity issues has effectively shut out large global institutions, thus providing smaller investors a clear window of opportunity. But as more companies come to market with public offerings and liquidity deepens, institutions will begin to move into Africa. In ten years many global institutions will be in Africa in some capacity. In twenty years they will all be there.

The Practicalities of Investing in Africa

There are 29 stock exchanges in Africa that represent the equity markets of 38 countries. (Two regional exchanges, one in West Africa (BRVM) and one in Central Africa (BVMAC), serve a total of 13 countries.) With the exceptions of South Africa, Egypt and Morocco, many of Africa's capital markets are in early stages of development and characterized by a relatively small selection of individual issues and light trading volumes. At present the market capitalization of all of the stocks markets on the continent is $1.5 trillion, about a tenth of the U.S. equity market. In coming years, we expect to see trading volumes increase as more companies come to the public markets.

Our Investment Strategy

Our Africa investment strategy seeks long-term total return from both income and capital appreciation through active investments in companies that we expect to enjoy profitable and sustainable growth in Africa.

Opportunities in Africa span all economic sectors. Because most African economies are in early stages of development, many attractive investments can be found in basic consumer goods and services. We expect Africans' disposable income to increase rapidly and therefore seek to invest in industries where that money will be spent. Personal communications, food and beverage, banks, health care and retail are all industries where we expect growing demand. As African infrastructure is being built out, there are also numerous opportunities in the agriculture, construction, telecommunications, energy and mining industries. While there are now many companies enjoying high profit margins in Africa that are suitable for investment, there is also a large list of companies that have yet to come public that will offer as much or more opportunity.

Just as with early investors in Asia and Latin America, we believe that investment pioneers in Africa are likely to find the journey challenging and often unpredictable, but ultimately very rewarding in the long run.


Peter C. Thoms, CFA
Founder, Africa Capital Group
peter@africacapitalgroup.com

This is Africa's Century

The importance of Africa to the G8 and G20 summits saw Canada’s leading daily newspaper The Globe And Mail for weeks, give its cover space to in-depth analysis of Africa development issues.

The series featured, among others, Liberia’s President Ellen Johnson Sirfeaf, ex-British Prime Minister Tony Blair, Nigerian writer Ken Wiwa, the Oxford University development expert Prof. Paul Collier, and the Canadian Geoffrey York, author of numerous books on development and the Africa bureau chief of The Globe and Mail. Dignitaries such ex-UN chief Kofi Annan, diplomats such as World Bank’s president Robert Zoellick, academics such as Harvard University’s Jeffrey Sacks, musicians such as Benin Republic’s Angelique Kidjo, models such as the French First Lady Carla Bruni Sarkozy, and media practitioners such as Amadou Mahtar Ba, founder of the giant AllAfrica.com, and others were also asked by The Mail to give their insights about “how Africa will change the world.”

John Stackhouse, The Globe and Mail’s veteran international development journalist, observed that “Africa is key to this century, a resource-rich and youthful continent that has found itself and is set to take on the world.”

Stackhouse’s optimistic view is backed not only by Africa’s improving governance index and its 1-billion population expected to rise to 2-billion by 2050 as market magnet but also the fact that “Africa attracted approximately US$63.6-billion in foreign investment in 2008, up from US$4-billion in 1995.” Stackhouse’s optimism is also revealed in the latest UN report that says Benin Republic, one of Africa’s credible democracies, has made significant gains in reducing poverty and infant mortality, increasing access to safe drinking water and expanding primary education, as part of the anti-poverty programs of the Millennium Development Goals (MDGs).

Saying the G8 and G20 countries better recognize Africa’s opportunities (as China has swiftly envisioned) or they will be taken by events, The Globe And Mail argued that “Africa, with its vast geographic advantages (the power of the Sahara sun, the flow of great rivers, and the geothermal potential of the Rift valley), resources (it produces half the world’s chromium, half of its diamonds, half its platinum, one third of its gold, and has one-tenth the world’s proven oil reserves and one-sixth of its forest cover) and population, is an unstoppable force. It is also an attractive place to invest.”

Notwithstanding these natural potentials, The Globe And Mail's African special edition depicted the two realities of Africa: the traditional and the modern, complimenting each other. For example, on Healthcare: “In Senegal, a woman is sprayed with a liquid believed to be medicinal to treat a fertility problem. But in South Africa, top surgeons perform complex operations with state-of-the-art technology.” On Education: “Children in Ethiopia take notes on paper. In Ghana, though, students are taught computer skills in a modern classroom.”

Technology is transforming Africa, knocking down old values and creating new ones. Democratic tenets such as the rule of law, human rights and freedoms, too, are increasingly being used to refine inhibitions of progress within the African culture.

Africa is being transformed. Africa’s mobile phone subscriptions rose from 55 million (five years ago) to 350 million in 2008, according to a UN report cited by The Globe And Mail. In Nigeria alone, phone subscription exploded from 400,000 to 70 million in just 9 years, “helping Mobile Television Networks become a global telecom player in the process,” said Papa Ndiaye, founder of pan-African venture Advanced Finance and Investment Group. That growth is the fastest in the world. With 1,500 ethnic languages and over 2,000 ethnic groups, Africa will have more than 500-million cell phone users by 2013. This is changing Africa’s businesses, agriculture, trade, security, medicine and democratic practices. “Video-enabled phones are helping Africa record human rights violations committed by oppressive regimes or corporations.”

African governments are hatching better foreign investment policies that have seen “inflows increasing 10 times in just 10 years,” and helped reduce dependence on the public sector.  “The result,” The Globe And Mail reveals, “is an astonishing growth in entrepreneurialism. Some 330 million people are estimated to now fall into the continent’s burgeoning middle classes. Where there are middle classes, there is consumerism.”  Ramesh Thakur, director of Balsillie School of International Affairs at Canada’s Wilfred Laurier and Waterloo universities elucidates that educated and informed, expanding middle-class (such as Africa’s) starts to assert itself democratically by exploiting the citizen’s levers in a free society, including the judiciary and a vigorous competitive mass media.

As part of the tenets of globalization, the African middle class has empowered its members to travel abroad and evaluate domestic governance against international standards. The Sudanese UK-based billionaire Mo Ibrahim has instituted a governance prize to check the health of Africa governance annually. The Globe And Mail used this to analyze the strength of Africa’s governance index and rankings in 2009.

In regards to the International Criminal Court investigating Kenya’s post-election violence and indictment of Sudan’s President Omar al-Bashir, African civil society is pushing for justice and gradually helping to change the behaviour of Africa’s notorious Big Men. Lawyers, human rights advocates and social activists such as the Nigerian Nobel laureate Wole Soyinka and the Ghanaian prominent journalist Kwesi Pratt have maintained the demand for criminal accountability through the growing mass media, the political process and the justice system. African democracy activists have joined forces with international counterparts to publicize and exert pressure for a settling of accounts in Africa’s lethargic courts. This partly explains Tony Blair’s explanation that the African development picture is promising, five years after the Gleneagles, UK G8 summit.

Liberia today illustrates the encouraging effects of good governance. The negatives: “For 14 years, our infrastructure was systematically destroyed, schools were demolished, hospitals were ransacked and plantations were ripped up.” The positives: “Since then, with the help of the international community, including aid agencies and private partners, a democratically elected government has begun rebuilding a shattered nation.” Rationalizing these, President Ellen Johnson Sirleaf thoughtfully makes it clear that in the long run, Liberia, like the rest of Africa, must rid itself of aid. “We can then continue our economic development and, with the right policies and international support, eventually leave the need for aid behind entirely.”

If Sirleaf’s call for good leadership, democracy and accountability is observed, it will contain “the scramble for” Africa’s natural resources to the good of Africans. In the past Africa’s natural resources have been “plundered.” Prof. Collier argues for the natural resources assets to be “harnessed – not plundered,” since “Africa is the last frontier for discovery…With high global commodity prices, these assets will be discovered. We are at the early stages of what will, over the next decade, be the scramble for Africa, Mark 11.”

As Equatorial Guinea negatively exemplifies (its huge oil and gas incomes have not lifted most citizens from poverty), the pillaging of natural resources is at the heart of economic tragedy, and “not necessarily environmental one,” making assets for citizens prosperity embezzled for the enrichment of the few. Collier argues, and Kofi Annan agrees, as Botswana positively shows, that the “struggle begins with the accountability of government to citizen.”

Today, the global atmosphere makes accountability to citizens about revenues from their natural resources compelling. In the coming years, this will be seen more in the giant and confused Democratic Republic of Congo whose mineral wealth is worth US$24-trillion. Collier says since 2003, “The Extractive Industries Transparency Initiative has been successful in pressing for the rights of citizens to know the details of resources revenues…A new civil society initiative, the Natural Resource Charter, compliments the Extractive Industries Transparency Initiative.” Collier’s hope is that Ottawa should use the June G20 summit to reach global concern regarding decisions required for “natural assets to be harnessed to ending poverty.” The challenge of Ottawa using its powerful clout to help end Africa’s poverty is that “at the end of 2008, Canadian companies had mining assets of US$21-billion in 33 African countries.”

To be continued.



By Kofi Akosah-Sarpong
Expo Times Independent Sierra Leone
Journalist