Is Africa a Less Risky Destination than the West for Private Equity Investors?

“Africa? I don’t know. Sounds risky.”

As an African private equity manager raising money from global investors, I’ve often heard variations of the above statement. It’s a barrier to any serious engagement on allocating investment capital to Africa because it reflects the widely held view that the continent, a relatively unfamiliar territory to many global asset managers, carries existential risks.

These perceived risks can seem so difficult to measure that many investors choose to remove an entire continent, with more than a sixth of the world’s population, from serious investing consideration. However, when we survey the global investing opportunity set, we have found that many of the same risks cited as reasons to avoid investment in Africa are today as serious, if not more so, across the world’s advanced economies. Put differently, the typical global investor’s view on Africa, driven largely by historical experience or soundbites, is outdated relative to today’s reality.

Start with political risk and conflict risk. News stories of African coups and conflicts foster the impression that the continent is dangerous and hostile to commercial activity. There are parts of the continent where this is true, and therefore, country and industry selection in Africa is key. However, in Cairo, Lagos, Nairobi, and Johannesburg, such issues do not slow the urgent pace of business. At the same time, advanced economies can no longer ignore the significance of political and conflict risks. Political dysfunction in the U.S. promises to be overwhelming as November’s elections approach. The Russia-Ukraine war has brought armed conflict to Europe’s doorstep. Tensions over Taiwan are high. These geopolitical risks, far from Africa’s shores, could have market consequences far greater than conflicts in Africa, yet we don’t see those risks reflected in global asset prices.

Another kind of risk is that of government interference in the economy. African governments have a reputation for meddling in the economy, steering money towards favored constituencies and industries. Across the world’s advanced economies, it’s clear that Africa has no monopoly on this behavior and its resulting economic distortions. As the U.S., China, Europe, and others jockey for control of the resources and technologies critical to progress in the 21st century, a dizzying array of new subsidies, tariffs, and legal actions reflect governments’ renewed interest in targeting favored industries with funding and protective policies.

Inflation and interest rate risk are part of Africa’s investing landscape. Annual price rises in African economies are often higher than the 2% inflation targets of advanced economy central banks, and African interest rates are also structurally higher. But in 2021 and 2022, advanced economies experienced their greatest inflation shock in four decades, causing unprecedented pain for consumers, which has since been compounded by sustained increases in interest rates, which pressure indebted consumers and businesses. In Africa, high inflation and interest rates are known quantities, and shoppers and business owners have lifelong experience adapting to them. Leverage is used only lightly in African capital structures, particularly when compared to the highly geared LBO models of advanced economies. So where is inflation/interest rate risk greatest? I’d argue it isn’t in Africa.  

In terms of currency risk, there’s no question foreign investors in Africa have been impacted by sharp devaluations in several countries over the past year, most notably Nigeria and Egypt. However, these devaluations have happened in the context of a transition to floating currencies, replacing managed exchange rate pegs against the U.S. dollar. By removing the distortion of exchange rate management, these countries are becoming more attractive destinations for future inbound investment, and the stage is being set for stronger growth in real incomes. This movie played out in many Asian markets after the 1997 financial crisis. In advanced economies, aging populations promise to stress government budgets, while high interest rates increase the servicing cost of heavy debt loads. With the U.S. running business-as-usual deficits of 6 percent of GDP, the dollar will eventually come under pressure to devalue as an adjustment mechanism to make debt loads sustainable. How better to repay excessive debts than to do so in a less valuable currency?

In Africa, several long-term trends underpin expectations for growth well above the global average in the years ahead. With a median age of less than 20, Africa has the youngest population in the world, and as other regions’ populations stagnate or shrink, Africa’s will grow. Continued urbanization, better education, and technology usage will accelerate productivity growth as Africa’s young move into the working population, with the continent’s workforce growing at a rate of almost 3 percent per year. More Africans than ever before will be able to leave poverty behind and spend more on health, education, and consumer goods.

We believe the perceived risk of African assets has excessively depressed their prices relative to the rest of the world. We also believe that the uncorrelated nature of African asset returns is not sufficiently appreciated by global investors. Africa’s longer-term growth trends have nothing to do with the next Fed decision on interest rates.

Against that backdrop, we encourage global asset allocators to give Africa a fresh look based on its current reality. Africa’s strong expected returns and low correlations allow asset managers to reduce their overall portfolio risk while achieving their targeted returns. As has happened in the past, periods are coming when African assets will outperform strongly, and their diversifying benefits will become clear. When this happens, those with the foresight to understand and get comfortable with Africa’s risks will be rewarded.

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Richard Okello is a Co-Founder and Partner at Sango Capital

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group