Africa keeps it in the family

Cross-border FDI four times rate of offshore inflows

INVESTORS from Europe, Asia and the US are not the only ones chasing growth opportunities in Africa these days — Africans are waking up to the potential across borders in their own back yard.

The same trends that have lured foreign capital to the continent — rising wealth, sustained economic growth and a swelling young population — are attracting investors from South Africa, Kenya, Nigeria and even Namibia.

From 2003 to 2011, intra-African investment into new foreign direct investment (FDI) projects in Africa grew at a 23% annual compound rate, according to Ernst & Young. Since 2007, that rate has increased to 32.5%, more than double the growth in investment from non-African emerging markets and almost four times faster than FDI from developed markets.

Cross-border African investment is set to accelerate as local firms seek new markets, resource-rich countries launch sovereign wealth funds and assets held by pension funds grow. Underpinning this are the favourable demographics of sub-Saharan Africa, the world’s youngest region, which will be the only region not to experience a decline in its saving rate by 2030, according to the World Bank.

By the middle of the century, Africa’s working age population will number 1.2 billion, from 500 million today, meaning it will provide one in four of the world’s workers, compared to one in eight from China.

While FDI and portfolio flows from outside Africa will continue to provide longterm capital, skills and technology requirements, many believe growing intra-regional investment will create a virtuous cycle, encouraging greater foreign investment.

“Foreign investors are much happier putting their money behind local investors,” said Gachao Kiuna, chief executive of TransCentury, a Nairobi-listed infrastructure company that invests in countries such as Uganda, Mozambique and the Democratic Republic of Congo.

South Africa has led the way in intraAfrican investment, with MTN and Shoprite among the first to venture north. Africa’s biggest economy is now one of the top five overall investors on the continent.

Kenya and Nigeria are also major crossborder investors. Nigeria’s Dangote Cement, controlled by Africa’s richest man, Aliko Dangote, is investing $5-billion to build an African cement empire, with projects planned in Cameroon, Senegal, Ethiopia, Zambia and South Africa.

Kenyan and Nigerian banks have also expanded into surrounding regions. Nigeria’s United Bank for Africa, with operations in 18 other African states including Ghana, Mozambique and Tanzania, expects to generate half its revenue from the rest of Africa in coming years, from 20% now.

“There is a lot of potential in sectors like oil and gas, which in the next 10 years will still be booming in Africa,” said Emmanuel Nnorom, chief executive of UBA Africa.

Africa’s burgeoning pool of savings will drive the intra-regional investment surge.

“Everybody talks about the rising middle class, growing urbanisation of the labour force. Even more important is the formalisation of the labour force, which is creating more contributors to pension funds,” said Eliot Pence at US advisory firm McLarty Associates.

Sub-Saharan Africa’s stock of capital is set to balloon to $23.3-trillion in 2030, from $11-trillion in 2010, according to a World Bank report published in May.

Pension funds could become prominent continental investors.

Renaissance Capital estimates that total assets under management of sub-Saharan Africa’s six biggest pension funds could grow to $622-billion by 2020, from $260-billion in 2010, and by 2050 they could balloon to $7.3-trillion.

Africa-focused private equity firms are already tapping local pools of capital. Emerging Capital Partners said 44% of investors in its third Africa fund established in 2008 were local institutions, up from 26.8% in its first fund set up in 2000.

South Africa’s Government Employees Pension Fund, the continent’s largest with about $120-billion in assets, is investing 1% of the fund in the rest of Africa, but can invest up to 5%.

Namibia’s $6-billion Government Institutions Pension Fund has a 27% allocation to South Africa and 8% to the rest of the continent, where it is investing in both listed markets and private equity, chief executive David Nuyoma said.

The returns have not disappointed, he said. “It’s been tremendous — 30%-plus year on year.”—