African investing Part 1: Africa is an opportunity to get investment right

FinanceWealth-Building

  • Author Will Jimerson
  • Published June 17, 2011
  • Word count 1,420

Africa is a unique investment destination for many obvious and well discussed reasons. Perhaps the most obvious is the fact that it is now recognised as one of the last places on earth where super returns are possible.

Its uniqueness also derives from the fact that its geographic, infrastructural, cultural and political environments are very different, not only from developed economies and other emerging markets but, within the continent, from one country to another. So, what works in non-African markets cannot simply be imposed on Africa.

Moreover, what works in one African country won’t necessarily work in another.

Super returns are indeed possible. But they can’t be achieved by a conventional approach to funding and investment.

Which is downright marvellous!

Because it means that people and institutions with money to invest have a chance to participate in the coming of age, after centuries of evolution, of the concept of investment finance – and, this time, to get it right.

Ad hoc is good, coherence is better

Historically, financing of projects, business, and growth has been an ad hoc process – driven by individual investors, human or institutional, making opportunistic decisions in search of profit. The ancillary benefits to investees have been a useful by-product, largely because more profit could be made if investees prospered. But pro-active creation of benefits for the investee was rarely the primary objective of an investment decision.

The invention of various types of financial tools and mechanisms has also occurred mostly in response to opportunity. Lines of credit, for instance, were first made available when knights off to the crusades found it too dangerous to carry their gold and silver with them. The Knights Templar stepped in by providing letters of credit that would be honoured in Jerusalem. In fact, the extended financial network operated by the Knights was an early form of banking.

One could say, I suppose, that there was a broader and faintly humanitarian motivation behind what the Knights Templar did – at least, from their point of view, in terms of keeping Christianity alive in the face of attack by the Ottoman Empire. But there was no thought of providing general benefits to the people of Europe and the Middle East, for whom the Middle Ages remained financially and otherwise extremely Dark.

Markets are good, communities are the reality

The point being that the willingness to provide money for the achievement of a specific purpose has arisen in relation to a specific need at a specific time, with no real coherence in the processes used or, more importantly, in the motivation driving the willingness.

People and institutions have always been motivated to risk their money on the chance that someone else will make more for them. They always will be. But they haven’t worked together in any coherent way, with a shared objective of building communities rather than simply markets.

As to coherence of process, that has developed gradually, at least in terms of creating global regulations that prevent the abuse of those in need of finance. That, though, deals only with the negatives of investment.

The difference that Africa makes to both motivation and process is that its own evolution out of millennia of oppression and conflict has peaked at exactly the point in time when the world is in a position to use in an integrated way everything it has learned throughout history about politics, medicine, technology, education, business, and money – for the greater good.

An economic conscience

Africa is an opportunity for the evolution of the human conscience to have no regrets – about the way Africa emerges from its own political and economic Dark Ages into an era of equality and equity.

Those of us in a position to provide the financial means for that emergence haven’t arrived on the continent in a galleon, having set sail from Europe to see if we would fall off the horizon. We haven’t marched into Africa with a Roman legion, trying to extend an empire.

Antibiotics and anaesthetics have been discovered. The human race has learned how to fly. We can light up the night, not with rushes soaked in oil, but with a switch on a wall.

We’ve learned so much. Specifically, we’ve learned so much about how to invest rather than exploit; about partnering rather than conquering; about the fact that capital is not only financial. It’s also human, social, environmental, and natural.

We’ve also learned that all forms of capital have to function together for any return we seek to be sustainable.

We know all this because our ancestors made all the mistakes. We don’t have to. What we need now, though, is the opportunity to apply what we’ve learned. Africa is that opportunity.

And here’s one example of how it can be done.

Restoration of a bread basket

Zimbabwe, once southern Africa’s breadbasket, has spent ten years in decline. Hyperinflation, sanctions, and internal political turmoil have decimated liquidity.

Two years ago, however, a power-sharing government was formed – and it dollarized the economy. The resulting stability has triggered a slow but persistent economic recovery, with growth being recorded at the end of 2010 for the first time in a decade.

Obviously, Zimbabwe’s neighbours have a vested interest in its recovery. So, in 2010, Zimbabwe and South Africa signed the Bilateral Investment Promotion and Protection Act (BIPPA) in order to create favourable conditions for investment between South Africa and Zimbabwe; provide security of tenure to South African investments in Zimbabwe; and unlock opportunities for the

Zimbabwean local industry to access lines of credit from South Africa.

First of a kind

On 18th March 2010, the first deal to be done under BIPPA was signed into life – with South Africa’s Industrial Development Corporation of South Africa (IDC) providing a six year term facility of US$30 million to the Agricultural Bank of Zimbabwe (AgriBank).

Established 82 years ago, AgriBank is one of Zimbabwe’s oldest banks and is a leading

provider of finance to the agricultural and industrial sectors. It also provides banking services to some of the country’s largest commercial organisations and, in recent years, has extended its client base to include the small and medium enterprise (SME) and consumer markets. In the process, it has developed one of the country’s largest branch networks. Increasing AgriBank’s own access to finance, therefore, holds extended positive repercussions for its client base throughout Zimbabwe.

AgriBank will use the IDC facility to on-lend to its blue-chip and medium-sized clients, some of which are listed on the Zimbabwean Stock Exchange - with a focus on increasing their production capacity.

US$20 million of the facility has been allocated to firms operating in the agri-business, manufacturing, and mining sectors. US$10 million will be on-lent to the Industrial Development Corporation of Zimbabwe.

The IDC Agribank deal is a significant step towards easing liquidity constraints for the Zimbabwean financial services sector and will, overall, assist in boosting economic activity in Zimbabwe.

In this particular instance, we and our Zimbabwean co-advisory partner, Neverseez Capital, arranged that the borrowing from the IDC not only be forwarded at competitive LIBOR-indexed interest rates but also be structured to ensure that a large portion of the funding will be used by Zimbabwean companies to purchase South African goods and services. The IDC facility will, therefore, also provide revenue opportunities to South African firms.

This is an example of getting investment right – in the sense that we, as Musa Capital Advisors, always advise our partners, clients, and competitors to link global capital (even when it’s right next door) to Africa opportunity in general and, wherever possible, to use investment to link African opportunities to one another.

Investment unity

The AgriBank IDC transaction goes well beyond simple investment, however. AgriBank’s main shareholder at the moment is the government. So opposition parties within that government had to come to the table to make the transaction happen.

In other words, the transaction brings together opposition views on Zimbabwe’s future as well as uniting commerce and government, commerce and the people, and a number of neighbouring countries – all with the single objective of bringing Zimbabwe back into the economic mainstream.

What was a breadbasket became a basket case. And with coherence of motivation and coherence of process aimed at making possible the right funds in the right place at the right time, Zimbabwe’s journey back to breadbasket is accelerated.

It’s an extremely practical example of how Africa provides the opportunity to get investment right.

William Jimerson, founder and executive director of Musa Capital, was born in Mississippi in the United States, studied at MIT, and worked on Wall Street as a financial analyst, before forming Musa Capital with three friends. The firm has a fifteen-year track record of growing small to medium sized businesses that want to expand but are too big for donor organisations and too small to interest large investor firms. www.musacapital.com

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