Why Pioneering Private Investors are Increasingly Critical to Africa’s Development

LAGOS, Nigeria, Capital Markets in Africa: Africa has long been a place for pioneers. With more than ten percent of the world’s population, and less than two percent of the world’s GDP, Africa needs far more investment that it receives. The challenge of identifying strong investments in a massive continent that is a complex array of 54 jurisdictions and even more languages, cultures, and political systems, has kept many private equity investors away. The Overseas Private Investment Corporation (OPIC) is not one of them. OPIC has 40 percent of our private equity portfolio invested in Africa and we plan to invest even more.

For more than 30 years, OPIC has been a strong investor in Africa, alongside some other pioneering investors who are supporting small businesses, and addressing a host of challenges from food insecurity to insufficient housing. As the U.S. Government’s development finance institution, OPIC has a mission of mobilizing private capital to address major world development challenges.

More recently the more pioneering investors from the private capital base are joining the other DFIs on the continent. In fact, in some cases, PE firms have raised all their capital from commercial investors with financial objectives only. Decades ago, private capital flowing into developing countries was a small fraction of aid dollars. But in recent years that ratio of aid to investment has flipped and the amount of investment flowing to the developing world far exceeds aid dollars. Private capital is flowing, from many sources, into many sectors.

The pioneers are not just the investors, but also the asset managers. Fifteen years ago, investors like OPIC had to choose between a handful of managers, most of whom were first time funds. Today, there are more than 200 fund managers that have raised $38 billion for the continent, and most of them have already invested significant quantities of capital into local businesses in Africa and other emerging markets. These pioneering GPs are being assessed against institutional standards of governance, investment process discipline, and reporting by their LPs. And, they are meeting these standards.

The ranks of pioneers in Africa also include the management teams of the portfolio companies who are introducing, for the first time, equity based compensation to African workers. They include members of diaspora communities who are returning to their home countries and bringing with them a variety of skills and knowledge. Venture capital is an asset class in Africa because entrepreneurs are raising private capital to introduce technology enabled consumer services businesses such as mobile banking into markets that will leapfrog Europe and North America.

These pioneers have all played important roles, and as a result the African private equity market continues to grow. OPIC is in Africa to support this growth, to help achieve important development objectives, and to help demonstrate that the returns that investors seek are available in Africa.

 In fact, this is exactly OPIC’s mission: mobilize private capital, promote development, and generate returns from our investments. Africa presents many examples about how we do all three.

Mobilizing Private Capital
Capital is never a scarce resource for projects that promise high returns; it is only scarce when people perceive too much risk and inappropriate returns. In Africa, investors have a host of concerns including currency risk, political volatility, corruption, deal access, and historic returns. While some of these risks are perceived, others are quite real. OPIC can help mitigate these risks – both real and perceived – to help returns-focused investors take their initial steps into emerging market private equity. Here are a few.

Early Diligence:
Many investors in North America and Europe lack the resources to do due diligence on far-away managers who may or may not achieve a target fund size. But OPIC routinely does this necessary early work. Alongside a qualified gatekeeper, OPIC will interview the team, visit the portfolio companies, research the target sectors, and scrub the fund terms, among other diligence items. In the process, we also help new and emerging managers bring their whole data room closer to an institutional standard.

And when OPIC commits to a fund it signals an important step towards institutional quality and the likelihood of achieving scale.

Integrity Checks:
The process of vetting key players is harder if the investors do not speak the local language or have access to local networks. Because OPIC can access to U.S. Government databases to check on the integrity of stakeholders, we are in a unique position. Before moving forward with a transaction, we contact the local embassy where the fund will be operating to ask whether there is any local knowledge that should give us pause. This provides an extra layer of integrity diligence that can be reassuring.

Shareholder Rights:
Corruption can contribute to a challenging business environment, but so can basic inefficiency or a lack of consistent business practices. OPIC is able to engage on these issues directly through contact with the State Department network of embassies. For example, on behalf of current fund managers, OPIC has engaged with U.S. Embassies to call on a central bank to expedite a foreign currency disbursement, call a regulator to get fairer treatment for a broadcast license, testified in court to address a corruption issue, visited a mayor to enforce a contractual payment obligation, wrote a letter expressing concerns about dividend streams.

Portfolio Monitoring:
While regulatory agencies of North America and Europe provide a baseline level of accountability and compliance, regulatory agencies in emerging markets may not be implementing the same standards or they may lack the resources to enforce compliance. OPIC can address this risk in two ways. Prior to investing we make sure that the fund manager is not only going to apply local law, but also that they are going to apply the International Finance Corporation’s (IFC) standards for human rights, environment, labor and other core factors. We also conduct on-site monitoring of active projects.

Political Risk Insurance:
Because investing in emerging markets poses its own sets of challenges, OPIC offers political risk insurance to protect investments against certain common risks. OPIC can write policies that will insure investors against currency inconvertibility, political violence, expropriation, and sovereign non-honoring of contractual obligations. We can also help insure a private equity buyer at acquisition, or insure a potential buyer of a private equity asset at realization.

Advancing Development
Since 1991, OPIC’s Investment Funds department has invested $5.6 billion across 82 funds operating in emerging markets around the world. Funds we have supported have built affordable housing developments, food processing plants, telecom tower networks, schools, hospitals, consumer goods businesses, tourist destinations, and created local jobs and economic growth.

All these projects have a profound, positive impact in places where too many people lack access to some of the fixtures of modern life like education, electricity and financial services, as well as basic opportunity. Getting these basic services in place helps lay the foundation for further economic expansion and diversification over time. Indeed, a dollar invested in Africa brings a much higher social return than the average dollar invested in most other developed economies.

A recent survey from the Emerging Market Private Equity Association (EMPEA) showed a significant share of global limited partners were seeking more than just financial returns: They were also looking to achieve greater environmental, social and economic impact through their investing. OPIC’s portfolio is full of examples where we have pursued, and achieved, great social and economic development returns.

Agriculture:
Silverlands Funds invests in livestock and produce farms across Africa and has achieved efficacies that have significantly improved crop and livestock health along with overall output and earnings potential for small rural farmers. For example, when Silverlands invested in a small cattle farm in Zambia, it helped grow the farm’s herd by more than 30 percent in a single year.

Consumer Goods:
The Helios Modern Africa Growth Fund invests in diverse range of sectors across 14 countries in Africa. From a pharmaceutical company in Ghana, which was able to bring anti-bacterial medicine to the market, to a pink rose exporter in western Kenya that created horticultural jobs, to an auto repair shop in Nairobi that now employs 20 people; Helios’ investments have stimulated the small businesses that are so crucial to economic growth and job creation.

Education:
Sarona Frontier Markets Fund, a “fund of funds,” has supported various portfolio companies across a variety of sectors that have yielded many benefits; including helping a school in Egypt create a special program to subsidize tuition for Syrian refugees.

Jobs:
Emerging Capital Partners’ investment in the Java Shop chain in Kenya has demonstrated that even a gourmet coffee shop can bring significant developmental benefits. Java House, which operate 41 coffee shops throughout Kenya has determined that green coffee beans generate significantly more local economic value when they are roasted ground, brewed and served at home. Java House has also created jobs that start at double the minimum wage and has, by example, helped raise the standard for employers throughout Kenya.

Achieving a Financial Return
Since a core piece of OPIC’s mission is to catalyze private investor capital into developing markets, it only follows that we are seeking comparable rates of return. OPIC has generated money from its investments for 38 straight years. Our charge is to be self-sustaining, and selecting good managers and good investments is essential to this challenge. Just as the very practice of investing has inherent embedded risk, so does economic development in frontier markets. For both objectives – financial and impact – we don’t always accomplish our desired outcome, but that is part of taking risk. The majority of our investments do succeed, and that makes all of our efforts worthwhile.

Emerging markets like those in Africa are without a doubt more complicated and more challenging than developed markets. But given their contribution to of our collective GDP, these markets are worth a closer look. And, given the interconnectivity of our global community, economic development in the emerging markets is an important good investment for world’s people. By helping investors feel more comfortable in these markets, OPIC can help them engage in some high growth places with significant potential to achieve returns and make a positive difference on the ground.

This article was featured in the INTO AFRICA July edition, which focuses on private equity in Africa and titled Private Equity: Africa’s Trump Card.