Private equity in Africa
HOUSED until recently behind a German beer garden in a shopping mall, Namibia’s stockmarket has just a handful of actively traded stocks. Its low profile is not unusual for Africa: the continent’s public markets are mostly small and illiquid. That is not the only reason why entrepreneurs find it hard to raise capital. Pension schemes, which provide long-term capital elsewhere, have been looted or repressed in many countries and are thus rarely viable investors. And local banks are failing to meet demand for affordable loans. Banking penetration is low and, with most households keeping their savings under the mattress, banks cannot recycle deposits into loans. Moreover, many were nationalised in the 1970s and have been poorly run since, often treated as piggy-banks by politicians.
Africa is desperately short of investment, both from locals and international investors: an extra $90 billion a year is needed for infrastructure, never mind other businesses. This is throttling development. Infrastructure bottlenecks alone are thought to cut growth in sub-Saharan Africa by two percentage points a year. But many of the normal routes by which capital gets into economies are blocked in Africa.
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The one door that has been wide open is that of privateequity, which raised a record $4 billion for Africa last year, helping businesses from toothpaste factories to mobile-phone providers (see article). Private-equity managers have always been willing to venture where others dare not. And for investors who want exposure to Africa, handing cash to such pioneers is often more attractive in terms of risk-adjusted returns than putting it in the underdeveloped public market.
In contrast to its reception in the rich world, private equity has been warmly welcomed in Africa. Some African governments have not only opened their gates to the barbarians, but have also offered sweeteners by, for instance, agreeing to have any disputes adjudicated abroad to mitigate the risk to investors of their assets being seized. But private equity alone cannot meet all Africa’s investment needs. Even if they could raise enough capital, funds generally want to sell the firms they acquire within five years, whereas Africa especially needs longer-term investors to pay for railways, power lines and the like. It also needs a multitude of loans for small businesses because banks across large parts of the continent have proved very poor at providing these.
Given the huge shortfall in capital, the returns to investors who do dare to venture into Africa can be enormous. Shareholders in Uganda’s privatised (and now publicly listed) electricity grid, for example, get a state-guaranteed return of 20% a year in dollars on all capital invested in the network. And the macroeconomic story is an appealing one: many African economies have grown by 5% a year or more over the past decade. Africa has the youngest population in the world. By 2060 the continent’s middle class is expected to triple in size, to more than a billion people.
With such juicy prospects investors should be flocking in. One reason they are not is because of capital restrictions in the rich world. New rules for insurance firms and pension funds in Europe, for instance, penalise long-term illiquid investments, such as the roads, ports and railways Africa so desperately needs. African governments are also to blame. Investors have not forgotten the rash of nationalisations across the continent in the 1960s and 1970s. Those governments that have defaulted on their debt (or had it forgiven) have to work particularly hard to regain international trust.
Priming the pump
To get capital flowing more freely, rich countries need to review their own regulations. Rules that punish the holding of long-term assets are one place to start. So too are over-tough rules against money laundering, which discourage honest savers from using the banking system, reducing the capital that banks have to recycle into corporate loans.
Finally, African governments could do more to encourage the growth of their nascent capital markets. The recent issue by several countries of inaugural bonds has helped establish the basics, such as benchmark interest rates and a corporate-bond market. But more is needed. Setting up larger regional stock exchanges could provide the liquidity, security and ease of access that investors crave. For this to happen, the continent’s leaders would have to set aside national vanity and instead focus on enriching the capital diet for all.