“Private investment in Africa” could be the title of one of those “world’s shortest books” that people make jokes about. But Africa’s economic story is beginning to develop new chapters, according to speakers at the recent Africa Business Forum organized by the Wharton African Students Association. The forum’s theme was “Africa’s Growth Engines.”
In a keynote address, James Harmon, former CEO of the U.S. Export-Import Bank, noted that while the wave of foreign investment in developing nations in recent years “has lifted boats in India, China, Southeast Asia and Latin America, Africa remains adrift.” All of Africa, he said, “gets less than one percent of global investment.” But Harmon believes this is going to change. “What has worked in other countries can work in African countries, too,” he said.
A major catalyst for change, he predicted, will be the “Millennium Challenge” program announced in March by the Bush Administration. Harmon, now a private consultant to the Administration and to industry, called the proposed program “a watershed event in U.S. foreign assistance.” Under this program, U.S. foreign aid will be increased from $10 billion to $15 billion a year with grants targeted to poor countries pursuing economic reforms. Harmon said African nations may receive anywhere from one-third to one-half of those grants.
“When I got my MBA from Wharton in 1959, Italy and France were considered developing countries and few of us even considered Africa at all,” recalled Harmon, who was with the international investment bank of Wertheim & Co. for most of his career. “That changed for me when I became CEO of the ExIm Bank.” (Harmon was appointed to a four-year term by President Bill Clinton in 1997.)
Clinton urged him to “think how we could increase trade and investment in Africa,” said Harmon, and during his four years as CEO, ExIm business in Africa increased from $50 million to nearly $1 billion a year. Along the way Harmon developed a continuing interest in Africa that has led him to take on the chairmanship of the Corporate Council on Africa, which represents 160 U.S. corporations with African investments.
According to Harmon, African nations have to look to foreign capital because “it will be many years before the rate of internal savings can grow the economy.” But African nations have to solve some problems on their own to cause that capital to flow. “No amount of international goodwill will matter until African countries adopt policies of transparency, reduce corruption, and accept the rule of law and other reforms,” he said.
He cited the tiny island nation of Mauritius (population, 1.2 million) as a good example of investor-friendly policies. Until 1982, Mauritius earned 99% of its income from sugar exports. In 1982, said Harmon, a new government reversed the usual policy of inviting foreign investment in the worst areas of the country with the least infrastructure. The government instead invited investment in the areas with the best infrastructure. “Four years later, manufactured goods replaced sugar as the leading export.”
South Africa, “with the best of intentions,” said Harmon, insisted that all foreign investors form a joint venture with a local partner. But after South Africa abandoned its joint venture rule, Mercedes, BMW, Volkswagen and Ford located auto parts assembly plants there.
Harmon could have cited the Africa-focused venture capital funds that were the subject of a panel discussion following his remarks as further evidence of change. Africa’s “high risk” reputation has not attracted such funds through most of its history. But the panel featured representatives of four venture capital organizations now deeply involved in Africa – all of relatively recent origin, each with a different investment strategy.
One panelist, Roger Jantio, managing director and CEO of Sterling Merchant Capital, said his firm benefits from the paucity of venture capital in Africa. “We love it. We are buying a bank that has been privatized in Togo. No one else negotiated to take over a company that has promise. We are getting some very good deals.”
According to panelist Tunde Onitiri, assistant director of Emerging Markets Partnership, what makes Africa a good place to invest is that “there is great demand” there. The demand for wireless service, he said, “has been beyond our dreams. In Nigeria, there are close to a million subscribers a year. That is favorable to private equity investors.”
Jantio noted that his firm’s first African fund, set up 10 years ago, didn’t do well. “We were focused on smaller businesses with a high learning curve. Fish farming projects were exciting but at the end of the day, they didn’t do us any good.” A reconstituted fund now specializes in banking, insurance and hotels and goes after only the largest operators. “We take majority control. We hire the managers. Sterling’s maximum investment is $1 million per company, he said, “but in Africa, a million is a lot of money.”
Onitiri’s firm, founded in 1992, became active in Africa only two years ago and has so far invested about $200 million in six countries. His firm’s strategy is to invest only in large, primarily regional companies, such as telecoms or airlines, with investments ranging from $10 million to $40 million.
“We look for companies strong enough to attract international sponsors and with strong local managements,” he noted. “We take a significant minority stake, which can be anywhere from 10% to 49% of the company. We insist on at least one seat on the board of directors with the right to veto appointments of senior management people & The firm’s goal is to achieve its return on investment by selling the company through a stock sale in three to five years. ”
Mitchell Fenster, an investment officer for Modern Africa Fund Managers, said his firm concentrates its interest in a geographic region, central Africa, rather than in specific business sectors. The fund, now in the fifth year of a 10-year plan, has invested $105 million in amounts ranging from $2 million to $15 million in companies ranging from a $100 million firm to startups. “We don’t play an active role in management. We just provide capital and financial expertise,” he said, adding, however, that every deal is preceded by “exhaustive research.” It takes “at least a year to close a deal.” In addition, the principals of the business “are people we already know. In Ghana, for example, he said, “the business community is small and the people in it are well known. ”
Samer Khalidi explained that he is not involved with a venture capital fund per se, but rather his role is to advise wealthy individuals and families. Unlike the other members of the panel who are all based in the U.S., he is based in the Middle East. “The single greatest challenge in entrusting funds is finding the right managers,” Khalidi said. “We spend a lot of time with the people we’re investing with, to determine if they can learn. We tap executives of other companies in our portfolio to offer advice.” The goal of the investors, he said, is to build up businesses to the point that multi-national companies will want to buy them.
The audience broke into applause when one of its number asked the panelists: “What are you doing to help the rural poor; what about social responsibility?” That prompted panel moderator Stephen Sammut, chairman and CEO of Buttonwood Ventures and a lecturer at Wharton, to respond: “Believing that a small private investor can step in to meet basic needs is a stretch. In many instances, the nature of the enterprise provides social good through housing and jobs, a case of doing good by doing well.”
Onitiri said his group makes sure the business “meets environmental
standards we are comfortable with and we hire local staff. But otherwise,” he added, “we rely on the trickle down effect.”
