Investing in Africa: Is now the time to jump in?

China’s involvement with Africa has skyrocketed in recent years, and it is forcing U.S. investors to re-examine their views on the continent as an investment destination. China plans to build its trade with Africa to $100 billion by 2010, almost 10 times 2000 levels, according to United Nations’ reports. In addition, Chinese foreign direct investment in Africa more than quadrupled between 2001 and 2005, according to a Stanford (Calif.) University research report. So why isn’t investment in Africa on U.S. investors’ radar screens? “The U.S. investor thinks of Africa as Darfur,” said Cynthia Steer, chief research strategist with investment consulting firm Rogerscasey in Darien, Conn. “But [China has] created a focused investment strategy in Africa and a cheap source of funds, providing significant liquidity to those that had not had access to it before; they’re changing the perception of Africa.” Indeed, the emerging economies of sub-Saharan states have enjoyed 5% to 6% growth rates for three years in a row, with 6% to 7% projected for this year, according to the International Monetary Fund in Washington. Some African stock markets saw index returns of 130% (Malawi) and 86% (Morocco) last year. A recent report from New York-based Merrill Lynch & Co. Inc. identified several major investment opportunities in Africa over the next 10 years: oil, commodities, agriculture, land and water, health care, infrastructure, telecommunications, information technology, defense, financial services and retail. New financial instruments are emerging. “We’re now buying sovereign bonds from Egypt, Nigeria, Ghana and Uganda,” said John Peta, senior vice president for portfolio development for Boston-based Acadian Asset Management Inc. “Many have only become available in the last year and a half.” Allan Kamau, editor of London-based Africa investor magazine, broadly characterized the 53-nation continent. “Oil-rich/commodity-rich countries like Nigeria, Angola and Sudan have a very different type of economy from countries like Kenya and Ethiopia that rely on agriculture. That is a key distinction, as most African trade is in the extractive industries,” Mr. Kamau said. He identified the continent’s largest economies as South Africa, Egypt, Nigeria, Kenya, Botswana, Tunisia, Morocco and Ghana. “We’re in the early days of an African renaissance,” said Jenni Chamberlain, chief executive of Securities Africa, a Johannesburg, South Africa-based boutique investment bank that serves foreign institutions. Her reasons include: • Global commodities demand, especially from China trying to secure its supply of natural resources. • A wave of political change across the continent. • Governments becoming more responsible. • Extensive foreign-debt relief freeing up funds for countries to make infrastructure investments themselves. • The advent of mobile communications. Africa’s investment climate is being helped by changing global trends, said Brad Durham, managing director of EPFR Global, a research firm based in Cambridge, Mass. “We’re in the process of a change in leadership in the world economy. Emerging markets have accounted for over 50% of the growth in the global economy [recently],” Mr. Durham said. Although economic improvements are occurring at a rapid pace, doing business in Africa isn’t easy. “The absurd levels of red tape in Africa are no accident: Every official hurdle to business is a potential bribe or favor,” according to a 2006 article by the Center for Global Development in Washington. In addition, “the liquidity [in Africa markets] is lousy,” said Roger Nusbaum, chief investment officer of Your Source Financial, a Phoenix-based financial planning firm with $60 million under management. Access to information is another challenge. A 2007 study by Africa investor magazine found that Bloomberg and Reuters cover less than half the African market. Investment vehicles also are lacking. “No one has done a comprehensive study of how to get there [investment-wise] and who to do it with,” Rogerscasey’s Ms. Steer said. But Americans’ interest in Africa’s investment potential is starting to percolate. In June, the White House announced its Africa Financial Sector Initiative, with plans to mobilize up to $1 billion in privately managed investment funds for Africa. “The level of debate within [institutional] investment committees has increased dramatically over the last year,” said Tom Gibian, chief executive of Emerging Capital Partners in Washington. Part of the reason for the increased interest is the emergence of a track record, he said. “Our firm has been able to demonstrate that Africa is not different than other markets, especially if you apply rigorous due diligence and proven private-equity skill sets,” Mr. Gibian said.