Why Not Africa?

Few investments exhibit the elevated risk-reward tradeoff as Frontier Markets, and much of Africa represents the most extreme example of this asset class. Considered the last investment frontier, being home to more than 1.3 billion people, with the youngest and fastest growing population, and rich in natural resources, the region is touted as providing a myriad of business opportunities for the entrepreneurial minded. While there are opportunities, political and geopolitical developments lead us to believe most direct Africa-based investments should be avoided. Note also that these companies don’t typically pass our screening criteria for corporate governance, financial strength, and sustainable competitive advantage. Thus, Africa-based corporate investments should only be for the most adventurous. Fortunately, there are multinational companies with meaningful, successful African operations, mostly based in Europe, profiting from select parts of Africa’s development. Some of these companies earned an allocation in our International and Global portfolios.

First, why not invest directly? After all, Africa showed tremendous promise, handsomely outpacing the world in GDP growth in the first decade of this century, growing over 5% a year, leading some to conclude Africa will be the world’s economic growth engine. Ah, but it didn’t last. Africa significantly decelerated in the decade and half since, with income per capita growing barely above one percent and more than half the population still living below the poverty line. Unfortunately, we don’t see a return to prosperity, at least in aggregate, in the near future. Many African countries continue to struggle with political instability, experiencing pervasive resource mismanagement, and have generally challenging business climates. Lacking the necessary financial and regulatory institutions, much of Africa suffers from weak accountability structures, leading to malfeasance, fraud, and other forms of misconduct. Indeed, Africa routinely scores poorly in corruption rankings. According to Transparency International’s Corruption Perceptions Index (CPI) 2024 report, the African Sub-Saharan region scored worst at just 33 on a 100-point scale. For comparison, the US scored 65. Notably, 90 percent of African countries score below 50, with only the Seychelles ranking better than the US. Moreover, just finding reliable information is an incredible challenge. Meeting with multiple Africa-based companies over the years, we find corporate disclosures either insufficient to gain an adequate understanding of the business risks or sometimes management reveals a disconcerting disregard for business ethics. Understandably, we’ve been reticent to invest with our primary objective being preservation of investor capital.

Alarmingly, far from improving, we believe Africa’s cross-continental chaos may worsen due to waning Western and European influence as the continent’s governments increasingly seek greater independence from colonial powers. North Africa alone provides several examples. At the end of last November, Senegal asked France to close its military base and Chad ended its defense cooperation agreement with France, having already expelled American soldiers. France also pulled out of Burkina Faso and both Germany and France pulled troops from Mali and Niger. France and Germany heavily invested in these regimes, notably, Niger and Mali in the Sahel region. These countries, despite professing to be democratic, were autocratic, but Europe invested anyway, desperate to keep immigrants from crossing the Mediterranean Sea. Russia, for its part, seeks greater influence in the region, trying to include much of North Africa like Algeria in its Eurasian Economic Union in an effort to dodge Western sanctions, as well as supporting, and some say instigating coups, previously through the Wagner Group, including the one in Niger. Niger represents a key target country for influence by both Europe and Russia. In addition to being a key uranium provider to France, the territory needs to be traversed by the Trans-Saharan pipeline, a project designed to take gas from Nigeria to an Algerian gas hub to connect to the Trans-Mediterranean and other pipelines destined for Europe. Obviously, Russia wants to prevent the delivery of this new source of cheap gas to Europe. That said, Russia also appears to be losing influence in North Africa with the Ukrainian War limiting its ability to support African militant operations. Senegal and Chad, despite evicting France, seek to maintain relations primarily with the West. Adding to the intrigue, Iran also contributes to the widening power vacuum in North Africa. Having lost Syria and probably soon, Lebanon, as well as reduced control of Gaza, Iran’s loss of Middle East influence, suggests an even greater pivot toward Africa. Iran already supports the military juntas now leading Mali, Niger, and Burkina Faso, and is now pursuing diplomatic relations with Sudan, supporting the Khartoum government in hopes of regaining access to Port Sudan. These represent just a few examples of the geopolitical intrigue in Africa, and reveal the potential hazards of the region. Disturbingly, the region’s troubles appear to be spilling over to Western Europe. Germany’s recent election, with its record turnout, and dismal result for the existing ruling Social Democrats, sent a clear message that voters want change. Part of the hoped-for change involves stopping illegal immigration from Africa and its associated terrorism. It remains to be seen how Germany and the rest of Europe can address the issue.

Given the admittedly scary conditions in much of the continent, many investors understandably steer well clear of Africa. We understand this attitude, but keep in mind that despite negative geopolitical developments and dismal continent-wide statistics, there can be specific countries and subregions in Africa providing companies with unique opportunities. There is not just “one” Africa. Tellingly, recent trends show a surge in foreign direct investment in several African countries including Nigeria, Kenya, and Ghana due to their improving economies, and the major European economies of Germany, France, Italy, Spain, as well as China increasingly seek economic partnerships with Africa to grow trade. This reflects the world’s shifting trade dynamics as well as recognizing Africa’s importance in several key industries like renewable energy, tourism, consumer goods, and infrastructure development. Robust growth experienced by select African countries and the surge in foreign capital led to a prediction by Henley & Partners Africa Wealth Report of an impressive 65% surge in African millionaires over the next decade. True, Africa represents a unique investment challenge, but there are lower risk methods to participate in this dynamic, high-potential market. ACM has several corporate investments based in Europe which benefit from these African opportunities. We believe this to be the best method to invest in Africa.

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