Investing in Africa Can Be a Challenge -- But Good Deals Are on the HorizonPublished: March 09, 2005 in Knowledge@Wharton
Winston Churchill once described Russia as "a riddle wrapped in a mystery inside an enigma." The same might be said today about the economy of Africa.
The continent is endowed with a trove of natural and agricultural resources -- oil, gold, diamonds, minerals, cocoa and coffee -- yet among its 54 countries are some of the poorest in the world. South Africa gave the world a sterling example of successful transition to democracy, yet a number of the continent's governments remain inefficient and/or corrupt. Africa is home to some of the oldest civilizations on earth, yet its economic development stubbornly lags the rest of the world.
Participants in the recent Wharton Global Africa Business Forum say Africa is showing signs that it has begun to break out of decades of economic malaise. Substantial businesses that don't just depend on resource extraction -- banks and telecoms, among them -- are cropping up, and educated Africans are increasingly looking for opportunities to start new ventures at home, instead of moving to the United States and Europe.
Even so, much work remains to be done if African nations are to begin to replicate the kind of economic successes recently seen in countries like China and India. Perhaps most important, Africans will have to toss out the inefficient governments that have too often plagued the continent, conference participants noted. "Our government systems create maximum benefit for politicians," said Manu Chandaria, chairman of the Comcraft Group in Kenya. "They are nothing but cost centers. The rule of law is too often compromised, and rights of property too often denied."
Wilfred Kiboro, chief executive of Kenya's Nation Media Group, argued that African executives and intellectuals have only themselves to blame for the recent history of inept and sometimes thieving regimes. "Leadership has a huge impact on the economic, social and political performance of any nation," he said. "And what we have seen in African states is a clear manifestation of failed leadership."
Scarcity of Reliable Financial Data
Even if many governments in Africa remain weak, entrepreneurial businesses are starting to bulk up across the continent. Consider Nigeria's EcoBank. Launched in the mid-1980s, it now serves 12 countries in West Africa and has $1.5 billion in assets, making it one of the largest banks in the region. The publicly traded company reported a profit of $22.2 million, or 39 cents a share, on operating income of $156.7 million in 2003.
Last year, EcoBank issued Nigeria's first international credit card. "We have been shocked by the demand," said Olufunke Osibodu, EcoBank's managing director. "There are huge risks, but there's no business without risk." One challenge has been trying to gather reliable financial information about potential customers, she noted. In the United States and Western Europe, banks have access to reams of such information. In Africa, it's scarce.
EcoBank's financial success also has given it the ability to back other entrepreneurial ventures. Last year, for example, it teamed up with Aureos West Africa Fund, a private equity firm, and provided $5.2 million for the management-led buyout of Portland Paints Nigeria, according to Osibodu.
Like EcoBank, Celtel, a mobile-phone company serving 13 countries in east and central Africa, is showing that new ventures can thrive when operating in some of the world's poorest countries. In fact, Terry Rhodes, Celtel's chief strategy officer, argued that the obstacles to operating in Africa actually created his company's market opening. "We sat down in the mid-1990s and wanted to do a phone company where we could be in a leadership position," he explained. "We did a global assessment and concluded that the best place was Africa because it was the least developed area in telecom. That gave us an opportunity to compete against the big boys, who have avoided Africa."
Founded only six years ago, Celtel has raised and invested about $800 million, and has 5 million customers and 6,000 employees in a region where mobile phones remain uncommon. Although the company serves Africa and was founded by an African -- Mohamed Ibrahim, who is Sudanese -- Celtel is based in the Netherlands. "We are run out of Europe because that's where the bulk of the money, technology and skilled people in our business are," Rhodes said. "About a third of our money was raised in the U.S., 1% in Africa and the rest in Europe."
As Celtel has built out its network, its executives have learned that western ignorance causes unique problems for people trying to create multinational businesses in Africa. The company won its first mobile license in Uganda. At the time, it approached a big American phone company about being its partner. "A board member there told us, 'We can't go to Uganda. It's run by Idi Amin,'" Rhodes recalled. "This was 1995." Ugandans drove Amin, a notoriously brutal dictator, into exile in 1979. Celtel's executives pointed out his error -- diplomatically, of course. The American's response: "If I don't know that, how do you think I'm going to persuade the rest of the board?"
Like many African businesses, Celtel has had to wrangle with political corruption. "Of course, we get approached for what I'll call 'contributions,'" Rhodes said. "We say, 'Mr. President, I understand that you're running for re-election, but all contributions have to be taken to our board.'"
Shakedowns such as this happen even though Celtel has carefully sorted through the countries in which it operates -- and those in which it refuses to. "We had an opportunity in West Africa and couldn't get sufficient comfort from the government there that they would stick to the rule of law," Rhodes noted. "So we gave our license back and wrote off $750,000. The government thought we were joking. They come back to us every year and say, 'Are you sure that you don't want to invest here?' We don't want any special treatment. We just want to be able to carry on business the same way as we do in other countries. Our assets are cemented into the ground. If something goes wrong in a country, we can't pick them up and go somewhere else."
Getting African regimes to operate legally and predictably is probably the biggest obstacle to the continent's development and to the continued growth of entrepreneurial businesses, Rhodes said. "African governments need to show the African community that they are living by the rule of law."
Money managers and venture capitalists who work in Africa face as many challenges as EcoBank and Celtel. Yet they, too, are afforded opportunities by the continent's relative lack of development.
Kehinde Oyeleke, executive director of Asset & Resource Management investment firm in Nigeria, described Africa has having a multitude of low-hanging fruit. "Many ideas that have been tested in the developing world, like cell phones, are still novel in Africa," he pointed out. "Good business ideas and capable management are what's in short supply. Most institutional investors are still frustrated by the quality of the deals available." At the same time, however, no market sector is saturated with products or teeming with competition, leaving plenty of niches for new ventures. As a result, "differentiated products can command a significant premium," he noted.
According to Kase Lawal, a Nigerian who is chairman and chief executive of CAMAC Holdings in Houston, Tex., many African countries lack such basic services as school buses. "Some children walk 10 miles to school. That's a tremendous opportunity. You can market safety and dependability." Deregulation and the privatization of state-run enterprises are also creating new markets and attracting international money, Oyeleke said. And wages remain low, giving labor-intensive businesses an advantage over competitors in the developed world.
As in any market, Africa's potential rewards don't come without risks. Besides the much-discussed political challenges, African firms have to contend with scanty infrastructure, both physical and financial. Capital markets in Africa are still in their infancy. That makes it tough for companies to raise money and thus makes the continent less attractive to institutional investors, Oyeleke said. Without easy exits, investors are less willing to provide the funds that firms need to grow. Another potential exit for big investors would be acquisitions of local companies by foreign multinationals. But "African businesses are unlikely to reach a size that makes them" appealing to buyers, he noted.
Private-equity investors haven't fared much better than money managers who buy shares in public companies, according to Runa Alam, chief executive of Zephyr Management Africa, the South Africa-based subsidiary of a New York investment company. Like Oyeleke, she stressed that African companies have few venues for raising public money: "You have Johannesburg and London." Unlike Oyeleke, she argued that investors have plenty of deals to choose from. Her firm looked at more than 50 last year alone. But she pointed out that these deals tend to be concentrated in a few countries -- Nigeria, Egypt and South Africa -- and a few sectors, such as telecom, financial institutions and resource extraction.