Sub-Saharan Africa is less exposed to worldwide economies and most of the region’s countries continue to see growth, according to a report by CDC Group.
Despite this, they are not completely insulated and are feeling the effects of the global financial crisis.
Jonny Gill, portfolio analyst, at CDC, says: “Local economies are suffering from lower remittances from nationals based overseas, a sharp fall in commodity prices, reduced donor funding and rising unemployment. In addition, much needed infrastructure projects are being put on hold adding to the difficulties faced by businesses. Countries that are overly reliant on commodities and/ or on the diamond trade, such as Botswana, have been hit by falling demand. As a result, private investment has dried up and many investors have pulled in their horns – particularly US hedge funds. It is a lot harder for fund managers to raise funds and get to a first closing.”
Gill says development agencies are hugely important in supporting private equity funds focused at sub-Saharan countries.
Attracting private investors has become particularly challenging as they are currently acting more cautiously, focusing their attention on the more developed emerging markets.
In 2010, interest from foreign investors is expected to grow but CDC expects investment levels to be lower than the peaks of 2007.
According to Catherine Swanepoel, investment executive at CDC, countries such as Rwanda, Liberia and Sierra Leone are making efforts to attract foreign investment. Along with improving infrastructure, their governments have created a more attractive environment for foreign investment, making it easier for businesses to operate.
“In some countries political instability, corruption and poor law enforcement remains a deterrent to foreign investment. While improvements are being made, law enforcement remains slow. Companies are taking corporate governance seriously and have realised that this has a major impact on reputation and shareholder value,” says Swanepoel.
Other countries which in the future could offer strong investment potential include Ghana, the Ivory Coast, Mozambique, Zimbabwe and Burkina Faso. Their wealth of natural resources has created a number of investment opportunities. However, Swanepoel says these countries would need to tackle a number of significant governmental issues and do more to encourage private sector growth.
Enrica Dacomo, portfolio analyst at CDC, says fund managers are monitoring and controlling portfolio companies more closely. The current investment environment means LPs can demand better terms. The exit environment will remain tough but Dacomo says we may see a continuation in the number of IPOs in the more developed countries, across the continent.
“Private equity funds are struggling to raise money but long-term returns are there, and Africa is still a good place to invest. Sub-Saharan countries have natural resources and many investment opportunities, particularly in underdeveloped sectors such as infrastructure, technology and mobile telecoms,” adds Dacomo.
