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The Most Severely Misunderstood Markets in the World can Achieve Outsized Investor Returns: Africa

Updated: Apr 4

I have talked to hundreds of potential investors over the last 6 months, and this, “Really? Africa? For investment?” question keeps coming up.

Inspired by a recent post by superstar fund manager Sango Capital about a more nuanced view of African risk, it’s time to gather all my thoughts in one spot: here’s the case for Africa as a destination for investment.

Two things happened to me in the last 6 months that really opened my eyes. First, I was asked to advise a highly-sought-after Stanford-trained machine learning software developer who was deciding between working at one of the largest global companies in the world and a tech start-up based in Africa. He chose the start-up.

Secondly, our company — Verdant Frontiers — returned $12M back to investors in dividends from the $180M portfolio we’ve built over the last 10 years. Yes, investors can — in fact — get money out of Africa.

To set up this topic, let me set up 3 guardrails:

  1. There’s too much hype about Africa being the greatest thing since sliced bread. Let’s not overstate the case to get investors to FOMO about Africa. Africa is NOT a get-rich-quick scheme.

  2. Africa is also not just the destitute land of warlords, child soldiers, drought, corruption, and famine. That’s about as true as saying that America is full of happy people with all of our wealth… maybe that is true somewhere, but in pockets. Usually very small, isolated pockets that don’t impact the main markets. “Africa risk” needs to be analyzed relative to the risk everywhere else. It’s not nearly as risky as you might think.

  3. Africa is an amalgamation of 54 countries. More on this later, but is “Africa” even the right frame? It’s time to look at the individual markets more closely as stable, strong economies are getting stronger. Like it or not, the tiering of markets within Africa is getting wider.

So, let’s not overhype Africa’s potential and let’s not overhype Africa’s problems, either. Maximizing return and minimizing risk — like anywhere else in the world — is not easy, takes time, and most of all, requires embarking on the right strategy with the right team.

To summarize this long post in 30 words:

1. Africa risk is much lower than you think. 2. Africa is growing differently than you think. 3. There are more $10B+ opportunities than you think. 4. The talent is better than you think.

Let’s start with every investor’s favorite topic: risk.

“Africa risk” is much lower than you think.

Most investment notions about Africa are 20 years outdated and biased. That’s understandable as things have been moving quickly. What has happened in the last two decades in Africa? On average: stronger governments, more stable political institutions, stronger rule of law, demographic growth, diversified economic progress, increased trade, new infrastructure, and good old-fashioned human ingenuity and striving. Basically, investment risks are dropping — fast. Most African democratic governments are less than 100 years old and progressing well — give them a chance to progress in a uniquely African way.

Are there still child soldiers, corruption, drought, and warlords? Yes. But only in pockets. And less than you think. It'd be like a well-intentioned friend from Asia asking if I’m safe going outside in Chicago with all the gang violence. The realities are always underneath the headlines.

Sango Capital, a long-time African PE manager with multiple funds, recently published an 11-page report about “Africa Risk.” This is the most comprehensive report I’ve seen on this topic — absolutely worth the read. Some of the key take-aways:

 — Don’t look at Africa in a vacuum. Relative to the rest of the world, Africa is a lot less risky than most people realize. EU, US, and Asia all face significant and elevated political risk and military risk.

 — High interest rates and inflation? Those risks have deepened across the entire world. Ironically, this is just another day in business in Africa. Strong businesses in Africa are likely some of the strongest businesses on the planet — they’ve been thoroughly tested over time.

 — Depreciation against the dollar? It’s happening globally, with some African countries even outperforming the Euro and the British Pound.

One key aspect of risk is competition, which I’d say is generally lower in Africa. I’ve reviewed thousands of tech start-up pitch decks. In the States, the IP, positioning, and product have to be so much more superior to the 10 others competing for the same space. Or you have to find a slice of a market that is hidden to the naked eye. For many opportunities in Africa, there are far fewer competitors and wide open spaces ready for the taking. Another way to put it: the ideas are easier, the execution is harder.

So, is Africa less known and less understood than developed markets? Absolutely.

Is Africa riskier than developed markets? Yes, but it’s not so clear anymore. Africa risk has been dropping for two generations while macro-risk globally has risen dramatically.

“Africa risk” is also significantly reduced by following a familiar refrain in real estate investing — location, location, location. Let’s stop looking at Africa as one place. As the most diverse continent on the planet — ethnically, culturally, linguistically, and even genetically, Africa represents 54 countries —  each with its own challenges and opportunities. Investment managers would be foolish to write off Europe simply because of the Ukraine war. Or, “The Americas” because of drug cartels in small pockets in Mexico. Or, “Asia” because of Afghanistan. Same goes for war and corruption and “Africa.” Look deeper — every continent has bright and dark spots.

To sum up:

 — Africa risk has been steadily declining while global economic risk has increased recently. The relative case for Africa is stronger than ever.

 — Africa risk is becoming less and less relevant of a framework, as each of the continent’s 54 countries walk their unique paths — and some markets progress or fall backward rapidly.

Africa is growing differently than you think.

Africa’s potential is growing with its population. Africa’s youth is the world’s future. By 2050, 2 out of every 5 kids born will be African. By the end of this century, there will be 4.3 billion Africans.

Source: Statista

Over the next 75 years, Asia and Europe shrink, the Americas stabilize (South America’s growth counteracts North America’s decline), while Africa’s population will triple. In 2100, half of the 10 largest countries will be in Africa.

Africa’s youth represents our collective future — literally. Look at these astounding population pyramids. Africa is so, so young.

Look at Africa’s current 0–9 population compared to the rest! (source: Population Pyramid)

Following this young population, also relevant is working-age people. Here’s a McKinsey chart showing that Africa will add 800 million working-age people from 2020 to 2050:

Source: McKinsey

The world's youth are African. The world's future workers are African. But one thing that needs to be said: we’ve all heard this population growth story, and it could be a double-edged sword — it is both an opportunity and a challenge. Population growth isn't automatically a growth opportunity.

What about economic growth? Africa’s GDP has been on a consistent growth curve for 50 years. And more growth is coming.

Sub-Saharan Africa GDP in constant 2015 $: 1971–2021 (Source: World Bank)

And similar to the point above about risk being a very specific dynamic country by country, growth has been also. Here’s the GDP data from the last 50 years for roughly 50 African countries where data has been available.

48 African Countries (Source: World Bank Data)

Moral of the story — pick your spots carefully and diversify.

Now, a brief geeking-out on macroeconomics is needed for full context here. Understand that the charts above are in constant USD, which effectively strips out inflation. If you look at the same chart in “current USD” versus “constant USD,” the picture is more mixed. Similar to McKinsey’s June 2023 analysis, 2000–2010 were undeniably major growth years, but 2010–2020 has been choppier.

Africa GDP in current USD (Source: World Bank)

This is largely due to inflation / currency issues in the two largest Sub-Saharan Africa countries: Nigeria and South Africa. Which leads us to our key take-aways:

 — Investors would be wise to look deeper into specific regions and markets. The “Africa rising” growth story is still relevant —  Africa’s growth has been astounding, but uneven — and maybe getting more uneven. So pick your spots wisely.

 — Population growth doesn’t necessarily mean economic growth, but usually it does.

Another way to frame the growth potential: Africa currently has ~20% of the world’s people, but only 3% of the world’s $100T+ GDP. What if Africa realized some gains and started to catch up — even if just a little?

In a world hungry for growth, fund managers still aren’t allocating enough to some of the fastest growing markets in the world. For institutional fund managers, wouldn’t it be rational to allocate 0.1–1% to Africa? For too many investors, the allocation is 0.00%.

There are more $10B+ opportunities than you think.

Africa has leapfrogged the West with mobile technology. Mobile phones are pervasive — approximately 600 million are African users. And many of those phones are attached to mobile wallets — now your phone is also your bank account. Africa is home to half of the world’s mobile wallets and 70% of mobile money value globally. And looking forward, Africa has the most compelling use cases of emerging technologies like blockchain. Get ready for some more leapfrogging ahead.

By 2025, 1/6 of all internet users will be African.

Africa has arguably the richest set of natural resources over any other continent.

60% of the arable land in the world resides in Africa. The entire world’s population could be fed from Africa’s lands, and yet Africa is still a net importer of food due to lack of investment, scale, and productivity. This is changing as more businesses build out environmentally-sustainable farms at scale. If Africa’s lands can be better stewarded and avoid desertification, over the next 20 years, the food at your dinner table will be increasingly from Africa.

Mining has been a huge opportunity — arguably so huge that it created a horrible coupling of corruption and exploitative extraction. All those cell phones and EVs will require a lot more mining. EVs require 6 times more minerals than conventional cars. What if we could mine gold, copper, battery metals, and other rare earth metals in the same way we grow fair trade coffee?

For a continent with a $3T+ GDP, we will see world-class entrepreneurs capture massive opportunities in Africa. Here are three $10B African opportunities that we are actively working in:

  1. Fintech — $1T of mobile money transactions will occur in Africa this year. And yet, 400 million people don’t have a bank account. Who’s going to build these systems and win this market?

  2. Orchard agriculture — Citrus, avocado, and nuts are each $10B+ industries that are growing quickly. South east Africa is already a top exporter globally, and this will only grow as more farms are managed well at scale across the region.

  3. Real Estate — 3 billion more people over the next decades have to live, work, and play somewhere. Real estate in every market niche will be needed, from affordable housing to diplomatic housing for foreign diplomats.

Aside: Africa is further de-risked with multiple pools of capital.

(For this whole section, prior to every sentence I write, insert the phrase, “for better or worse.” All capital comes with strings, some good, some bad, but mostly both.)

The rest of the world has varying incentives to see Africa succeed. As such, there are pools of capital that are not purely driven by risk-adjusted commercial return. A few examples:

  1. “Development money” is available in quantum of the billions of dollars, from development financial institutions (DFIs) that are investing in Africa based on varying themes. From climate change to agriculture to digital transformation to small business financial inclusion to job creation, these investors typically will invest in some concessionary way — i.e. they are willing to take on more risk or demand less return than a typical commercial investor.

  2. “Impact investors” are private investors who, similar to DFIs, are investing with a primary or key purpose of impacting African society in a positive way with lowered return expectations. A lot of foundations, individual angel investors, and non-profit funds would fall into this category.

These investment instruments take on a variety of structures, but many will provide a low-interest loan, create a first-loss guarantee structure, or create a more flexible loan structure. These structures effectively de-risk the venture, enabling the commercial investors to invest on commercial terms.

The talent is way better than you think.

Ok, I admit this point is 100% anecdotal and based on my personal experience. I’ve now had roughly 700 (yes, I counted!) one-on-one coffees with entrepreneurs, investors, and ecosystem builders across Africa.

As a guy who has built 7 companies and sold 4 of them, I’d like to think I’m a decent judge of talent and character. Honestly, I’ve been blown away by the talent I have met in Africa. I personally know many world-class African entrepreneurs who could out-execute anyone in the world. A lot of the CEOs of our portfolio companies are second-time, third-time entrepreneurs with previous exits. Many are also fortunate enough to be educated or have some significant experience overseas. They have a unique combination of hyperlocal context and global experience. I’m also blown away by the problems entrepreneurs are trying to solve — hard, tricky problems that if solved, could impact a billion people. As some of these companies scale, they will solve problems that impact society far beyond many aid/donation models. This combination of great entrepreneurial talent solving important problems is why I love working in the African ecosystem.

Our agriculture teams have been running farms across Africa for 25+ years, with experience managing tens of thousands of employees and running farms through seasons of hail, drought, riots, unexpected new regulations, post-election violence, cartel violence, elephant stompings, and flooding.

Our real estate development company built two massive projects totaling $140M with exacting requirements from the US Government — on time and at budget, during COVID.

But, how do you actually invest in Africa?

Simple (but not easy) — investors can make real returns in Africa with the right team and the right strategy. Here’s the playbook we’ve been operating for 10 years. We're building the Berkshire Hathaway of Africa, and it’s starting to work:

  1. Find the right multi-billion dollar niches. There are plenty of them. In fact, I’d argue the ideas are easy. It’s the execution that’s hard. And the hardest part of the execution is to…

  2. Get the right team. Veteran leaders with both hyperlocal context and global experience. They will execute with excellence and integrity. Preferably, this won’t be their first rodeo. Ideally, it’s their fifth or sixth.

  3. Diversify sectors and geographies. For example, we’re in 3 strategic sectors — real estate, agriculture, and tech — operating in 9 countries. Among Africa’s 54 countries, we tend to operate in the top 10 in terms of “investability,” which factors in regulatory frameworks, rule of law, land/property rights, political stability, forex/currency stability, etc.

Simple, but not easy!

Even in this difficult macro environment -- and maybe especially because of this difficult macro environment, the many markets and opportunities that lie within Africa are worthy of real consideration.

If you'd like to know more about investing in Africa or about the African venture capital fintech fund I just launched, connect with me on LinkedIn.

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