Doing business and investing in “Africa”

The past week has been a bout of reality checks in the month before I leave for Africa.

It began on Tuesday in class, when Sloan Professor Tavneet Suri and World Bank Ombudsman Thomas Zgambo uprooted my mis-perceptions of the continent, and ended on Friday at the Sloan Investment Conference, where conversations with The Abraaj Group (North America) CEO Tom Speechley and Cape Town-based Perpetua Investment Managers CIO Delphine Govender showed me how understanding Africa needs to start from a blank piece of paper.

Here’s a recap of my takeaways:

1) Start from 101

When contemplating obstacles to the M-PESA in Kenya, business school-type responses were offered: credit, literacy, cost, etc. What most of us missed, however, was the lack of electricity in rural areas where M-PESA is targeted.

Wow. When we discuss impediments to scaling of consumer technology in business school cases, how often does one factor in electricity, a Second Industrial Revolution technology, into the equation?

The lesson for anyone building a business in Africa is simple: start from the basics. Market features we take for granted in developed and (even some) emerging markets are not always present in African frontier markets, and these can kill business models as easily as fickle consumers in developed economies can do to iPhone/Android apps.

2) “Africa” is huge

africa1

Both Thomas Zgambo and Tom Speechley shared the above diagram to emphasize the vastness of the African continent; trying to understand “Africa” from the top down is as useful as pushing on a string. TV commentators speak of the growth of the “African continent”, but cities, rather than countries (much less the continent), are the focal point of growth. Consider these stats that Tom Speechley shared: household consumption per capita in 2012 was $1,400 in Kenya (national) but $3,600 in Nairobi, $1,700 in Nigeria (national) but $4,000 in Lagos, and $2,300 in Ghana (national) but $3,700 in Accra.

The lesson I learnt is: high-level summary statistics masks important underlying trends of the continent. Further, “Africa” is really just a news headline concept. To get to know “Africa”, start from Johannesburg, Kigali, and Dar es Salaam, etc.

3) Access to growth through private markets

First, the facts. With a $760 billion market capitalization, Apple is the easily most valuable company in the world. The total market capitalization of all companies listed on the Nigeria stock exchange, however, is a mere $80 billion. And out of this $80 billion, 70% is accounted for by the largest 10 firms. The corresponding statistic for South Africa is 52%.

The point is that public markets do not offer the best route for an investor to gain exposure to the growth story of African countries. There have been discussions of a pan-continent exchange (similar to the Euronext) to enhance liquidity of African public markets, but this is unlikely to materialize given the nature of local geopolitics and weak regulatory regimes.

That leaves the private market as the most logical source of investment opportunities. At a time when rule of law and corporate governance leave much to be desired, the concentrated ownership of private equity (in which investors can easily fix misfiring firms) is probably the best mode of investing in Africa.

Damien Niam

MBA at MIT and MPA at Harvard. Interested in value investing, economic policy, financial regulation/reform, and economic thought. BA in Economics from the University of Cambridge.

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1 Comment

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