African economies have grown 5% a year on average in the past two decades, but global institutional investors remain on the sidelines. Guillaume Arditti and Aubrey Hruby write that the views of African risk remain stuck in the past. As returns stagnate and liquidity increases, investors must update their Africa risk perceptions. The Africa of twenty years, ago when the Economist dubbed the region “the hopeless continent”, is not the same of today. Investing in Africa has become a mainstream necessity.
With the rapid slowdown in the US and European economies and fear of recession looming large over 2023, investors must work harder to find returns. The Ukraine war has made blatant what the COVID-19 crisis had already revealed—the economic dependence on key sectors and key markets. Over the past ten years, yields maxed out between 4% and 5% and today over $10 trillion sit in negative yield bonds. Institutional capital has also remained concentrated in developed markets, as investors sought to optimise for near-term returns rather than sustainable returns through diversification. The situation has resulted in unprecedented levels of liquidity: global assets under management have grown by more than 40% since 2015 and are expected to increase from $110tn today to $145bn by 2025. Investors seeking returns need to look to new markets and yet Africa—the demographically most dynamic region of the world—has been stubbornly ignored. The continent’s average growth over the last two decades has oscillated around 5% and its 2020 contraction due to COVID-19 was only 2%, far less than in the OECD countries.
Despite the compelling economic data, the African growth story has not resulted in the concomitant boost in investment from global players. Investment into the region is made by the same long-time investors (including the development finance institutions), while mainstream institutional investors remain on the sidelines. Surveys have long documented the difference in risk perception between investors with established operations on the continent and those that are considering opportunities from afar—those already invested in the region see Africa as the most attractive investment destination while those that don’t have operations in African markets view it as the second least attractive. The view of African risk remains stubbornly dichotomous, oscillating between seeing the continent through a lens of foreign aid and another that embraces the high risk/high return view. Furthermore, the mainstream investment strategy used by investors in developed markets is data dependent and push oriented making it ill-suited to African markets.
Developed markets are data rich. In North American or European economies, investing is governed by subsector experts who focus on niche industries and specialised asset classes. The internet economy of the 2000s and the growing importance of big data and AI-powered analysis has accelerated the specialisation – and the data reliance. In contrast to developed economies, African markets are defined by a lack of reliable data and strong interaction between political and economic realities. Cutting and pasting the data-dependent, specialist model in African markets leaves managers ill-equipped to understand and mitigate the operational, on-the-ground risks.
Success in African markets requires an understanding of the intersectional, long-term trends currently reshaping the continent. Most investors still operate on dated perceptions of African markets driven by oft-repeated factoids and the news cycle, failing to recognise the mutually reinforcing trends that have over the past 20 years restructured many African economies and enhanced their resilience. Coups grab headlines but day-to-day political stability makes for boring news. Despite the recent coups in the Sahel, the map of Africa is no longer a swath of autocratic regimes as it was in the 1980s but rather a mosaic with standout democracies such as Ghana and Senegal, which have maturing institutions. Regional powers such as Kenya and Nigeria, despite setbacks, have also been on a trajectory of democratic progress.
Accompanying the increasing political stabilisation, economic diversification has also shored up African resilience. The sustained growth the continent benefited from cannot only be attributed to high commodity prices, but also is the result of a progressive shift away from raw material exports towards services and middle class-based consumption. The “oil curse” which colours the conversation of African economic growth is proving to be less powerful even in oil-exporters such as Nigeria. The oil price collapses of 2008 and 2014-16 revealed a previously unrecognised level of resilience—they did not result in the stagnation of the 80s and 90s. Instead, growth recovered in 2017, revealing structural improvements particularly in Nigeria. The COVID-19 contraction was similar. African growth bounced back to 3.7% in 2021 after contracting by 1.7% in 2020.
Understanding the transformative macro trends is necessary but not sufficient to deliver success–it is also critical to employ a pull rather than push strategy. Push strategies work well in consumption-based economies supported by efficient capital markets such as the US or Europe. Many investors are looking to simply add a high-risk premium to compensate for investing in African markets on top of their familiar underlying asset structures. Some seek short-term liquid and safe assets like treasury bonds while others pursue high internal rates of return (IRR) in a seven-year fund lifecycle. Some are looking for real assets with developed secondary markets to ensure liquidity, while others want to deploy billions of dollars through thematic strategies like infrastructure or climate. Each “push” strategy will be exposed to difficulties that can create goldilocks-type scenarios: not enough market depth, too few “bankable” projects, too much volatility, not enough liquidity, too risky, not profitable enough, etc. The list of reasons not to invest in African markets therefore becomes overwhelming and results in the accumulation of dry powder
Fundamentally, African market realities require trade-offs; liquidity often comes with volatility due to systemic local currency risk on the continent. If large asset managers want liquidity, they can buy bonds in Cairo, Lagos or Johannesburg but must accept the concomitant volatility and depreciation risk resulting from the underlying assets being valued in local currencies. If predictability and stability are desired, then an investor must prepare for illiquidity. While investing in illiquid assets in the real economy offers opportunities ranging from infrastructure to agribusiness to renewable energy, exits are difficult to time. The classic high risk, high return investment profile does exist but is now concentrated in the emerging tech and creative industries.
The associated risks with investing in the old Africa of twenty years ago when the Economist dubbed the region “the hopeless continent” are not those of the Africa today. Risk perception must be updated to reflect the increasing resilience, digitisation, and integration that now are taking hold in African markets. The investors who will succeed will work to understand market realities instead of coming with pre-defined investment strategies, will find the overlap between their internal requirements and market needs, and will embrace flexibility and intersectional approaches. The geopolitical and economic dynamics of this post-COVID-19 world make looking at African markets not a niche option but rather a mainstream necessity.