Is Africa the new Eldorado for capital investors?

Is Africa the new Eldorado for capital investors?
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Over the next three years economic growth of Sub-Saharan Africa reaches 5% and will be higher than aggregate world growth. Capital investors are noticing.

In an economic context of recession in Europe, where countries like Cyprus struggle with debt and austerity, and where the United States is finding it hard to reach 2% of growth, still fighting to get out of the remnants of the 2008 financial crisis, capital investors are looking for new places to invest. For a few years now they have gone to China and other emerging markets, including parts of South America, which is growing quite quickly as well. Will Africa be the new hot place for capital investors?

Robert Kaplan’s The Coming Anarchy depicted Africa in an apocalyptic way, predicting an even worse future for the region and for the rest of  the world if Western countries did nothing to stop civil wars, disease, genocide, rebellions and coup d’états. If Kaplan’s depiction were true, it would have been nonsense to ask this question. However, a recent report from the World Bank states that over the next three years economic growth of Sub-Saharan Africa reaches 5% and will be higher than aggregate world growth. Now the question deserves to be asked.

And this report is far from the only reason to believe that Africa will be the new Eldorado for capital investors. Recently, more and more interest has been given to the African continent. Interest is evident, for example, in recent big transactions made by private equity funds with world-class reputations. The American Carlyle fund invested US$210 millions in ETG, an agricultural commodities trading firm from Tanzania, while French Wendel invested 125 millions euros in IHS, a Pan-African operator of telecommunications towers, and the South African Ethos raised $800 million to invest in medium and big enterprises in South and Sub-Saharan Africa. In addition, American Blackstone plan to invest $3 billion in energetic projects across Africa.

It is true that institutional investors such as the IFC, the Dutch FMO and the French Proparco remain the most active in the continent for now, but private capital investors and investment banks from all over the world are showing more and more interest in Africa. The financial advisory and asset management firm Lazard recently created a division dedicated only to Africa, and Bloomberg announced that KKR, the world’s biggest capital investor, is looking to invest in the continent.

The growing investor interest is grounded in real African economic potential. In fact, nowadays, the highest returns on investment can be achieved in Africa and according to M. Rigouzzo, a former head of the AFD (French Development Agency), investors can obtain as much as 30% return in sectors showing rapid growth, including the telecoms sector. Moreover, 60% of global available land is in African and very soon, the continent will be the home of 20% of the world’s population, with a middle-class of 250 million people representing a $2 trillion market. Peaceful democratic transitions in Senegal, Ghana and more recently in Kenya, in addition to these major demographic and economic shifts, present considerable investment opportunities on the continent.

These opportunities will be available in sectors such as infrastructure and energy, where the deficit in Africa is considerable due to the lack of investments caused by decades of civil wars and political trouble, but also in the financial sector, which needs further development in order to allocate capital more efficiently in economy, and in the agribusiness value chain, which represents a substantial part of most African countries’ GDP. Furthermore, African countries are achieving greater political stability and political continuity, which are prerequisites to attract long-term investments to the continent. The future for Africa seems to be very bright in terms of investments, and investors are already moving there. Foreign direct investment in the continent was $43 billion in 2011, between $55 and 65 billion in 2012, will increase to between $70 and 85 billion in 2013, $75 to 100 billion in 2014, and should reach $150 billion by 2015. Even if it remains a small part of the world’s foreign direct investments, currently less than 1%, investment is constantly growing, which suggests that Africa will probably be the next hot spot for capital investors.

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