by TheLuxe Africa™ | Jan 14, 2017 | Finance
2016 has been an eventful year globally. Political and economic change and, to some extent, uncertainty became part of the landscape in much of Europe and the US. Notably, Britain voted to leave the European Union in June, and in November, the US voted to elect a President with a more insular focus on US interests.
The African investment landscape has not been impervious to the consequences of these geopolitical events. For example, the steady rise in the US dollar and the renewed focus on investment in the US has led to the continued flight of short-term capital out of Africa back to developed markets.
A fall in commodity prices last year, which started in 2014 (speaking principally about oil, coal and iron ore), had an even more dramatic impact on the macro economic landscape in sub-Saharan Africa. The region’s three largest economies (Nigeria, Angola and South Africa) saw their GDP growth slow and, in some cases, even contract as a direct result of this, leading to falls in the value of their local currencies.
Africa Rising
All of this has led some sceptics to question the “Africa Rising” narrative that took hold in the years following the 2008 financial crisis, when economic contraction in the US and Europe coupled with a commodity boom led investors to Africa in their droves. I am not one of those sceptics, but I am an Africa realist.
In my opinion, Africa is still rising and will continue to do so for many years to come, spurred on by an undercurrent of immense, unrealised potential. However, the macro-economic landscape in 2016 to me represented Africa reaching adolescence from an investment perspective. With growth comes growing pains and volatility. Those private equity investors who understand this, and who are patient and see the long-term economic gains to be had from investing in Africa, will stand to benefit as the macro-economic environment improves in the coming years.
Investment trends
From a fund raising perspective, 2016 was a relatively quiet year compared to 2015. While 2016 saw a slowdown in deal activity (largely due to currency volatility in countries such as Nigeria and Egypt), there were a number of notable and interesting deals that show private equity investors in Africa are still willing to back companies where they see long-term growth opportunities.
Notable examples include the $80 million investment by African Capital Alliance and 8 Miles in Beloxxi (a Nigerian biscuit manufacturer), and the $115 million investment by Helios Investment Partners in Oando Gas and Power in Nigeria. There was also strong deal activity in Kenya, which has been a resilient economy in 2016, with Apis Partners investing in Direct Pay Online (a fintech company) and LeapFrog Investments making a $22 million investment in Goodlife Pharmacy.
While the commodities sector saw a slump, technology, financial services, financial inclusion and infrastructure were prominent in 2016 and this will likely continue in 2017. Mark Zuckerberg visited Kenya and Nigeria and invested $24 million of his own money into Andela, a company that trains African programmers in Nigeria and Kenya. CDC invested $55 million in a Nigerian internet retail company, Jumia, and Helios’ portfolio company Insterswitch acquired VANSO, a Nigerian mobile money company.
The appetite for investment into insurance and financial services also seems undiminished, with notable investments by Swiss Re in Leadway Assurance in Nigeria and DUET Private Equity’s investment in Fidelity Bank in Kenya. There were also some encouraging exits (the alleged paucity of which is often talked about in Africa’s private equity circles) with Actis selling Egypt-based Emerging Markets Payments to a Warburg Pincus portfolio company, and Helios selling Helios Towers Nigeria to IHS Towers.
2017 outlook
Overall, the African investment landscape was shaped by the tumultuous economic climate last year, and it would not take a soothsayer to argue that 2017 will be equally eventful. Looking ahead, key themes and trends that are likely to characterise investment across the continent include:
Fund raising – While the macro-economic environment is challenging, those funds that can demonstrate a real track record of understanding and investing in Africa will continue to attract funds from Limited Partners. Of particular significance is the UK government’s proposal to increase CDC’s available funds from £1.5 billion to £6 billion. Watch out for the much talked about permanent capital vehicle (PCV), which will allow investors to hold investments for longer and ride out short-term macro-economic turbulence.
Macro-economics – Nigeria and South Africa account for half of sub-Saharan Africa’s GDP. A recovery in either or both of these markets will generate a significant rise in deal activity. In particular, a truly free-floating Nigerian currency would provide a tremendous boost for private equity investment by providing investors with stability. Economies like Kenya and Ethiopia will continue to attract investment.
Sectors – Technology and, in particular, fintech will continue to attract investment as Africa looks to this as an enabler (rather than a disrupter) to leapfrog existing bottlenecks. Similarly, infrastructure, particularly around power generation and distribution, will continue to attract investment. Following Denham Capital’s $250 million investment in GreenWish Partners this year, the appetite for renewable energy investment going into 2017 is likely to continue unabated
Weyinmi Popo is a partner at Orrick, Herrington and Sutcliffe. Weyinmi’s African work includes advising various Africa focused private equity sponsors such as Helios Investment Partners, LeapFrog Investments and Adlevo Capital.
by TheLuxe Africa™ | Jan 14, 2017 | Technology
The ‘Africa Rising’ narrative is increasingly giving way to that of ‘Aspiring Africa’, as the Base of the Pyramid (BoP) shrinks and the new middle class burgeons.
Central to this new narrative is inclusive growth: the idea that economic growth must come with equitable opportunities for all participants, with benefits enjoyed by every section of society.
As Africa develops, it is pivotal to ensure that the currently under-served majority feels the benefits. This is not only about poverty reduction, but about creating opportunities for lower-income segments to generate wealth. It is a virtuous cycle; inclusive growth equals faster and better economic growth.
If we can ensure that Africa’s economic development happens in a more equitable and sustainable way, the macroeconomic positives are myriad. Offering young, aspiring Africans the opportunity to create wealth, has the effect of turning this demographic into producers and consumers of additional products and services.
Role of technology
Africa’s mobile revolution has offered entrepreneurs an opportunity unlike any other to disseminate products and services that can contribute to inclusive growth on the continent. It enables digital innovation that allows African entrepreneurs and developers to leapfrog technologies, creating access to previously unavailable services for the majority.
Finance is a key enabler of growth, which is why the provision of accessible and affordable financial services to the majority of Africans is a prerequisite for faster and more sustainable development. Access to financial services increases access to other opportunities, hence fintech becoming central to Africa’s inclusive growth story.
For example, South Africa’s Nomanini, is allowing informal merchants to improve their income generation capacity by selling airtime and other digital services through their point of sale (PoS) devices. This creates a ripple effect. By increasing the wealth-generation capability of the majority, it allows them to access additional products and services and contribute to economic growth.
The trend goes beyond financial services, however. In healthcare, diagnostic apps such as Vula Mobile are making world-class diagnostics available to lower-income segments in a more affordable way.
Africa’s mobile revolution has offered entrepreneurs an opportunity unlike any other
Companies in the education space are making digital content available to young Africans, while in agriculture, mobile is being used by companies like Kenya’s WeFarm to disseminate crucial information for farmers, having a direct impact on their productivity and wealth-generation abilities.
Africa is seeing the same technology innovations that are emerging in developed countries, however, they are used in a unique manner.
In Africa, technology is not replacing or assisting existing infrastructure; it is creating the infrastructure where there is none. Brick-and-mortar clinics, schools and grid-powered electricity are not in place across vast swathes of the continent. And they will not reach every rural village or urban slum in the future. Instead, these services will be provided more and more through innovative mobile technologies, reducing the need for expensive physical infrastructure.
In its ability to democratise and increase access to more affordable services that have, until now, remained inaccessible to the majority of Africans, technology has the potential to play a huge role in ensuring inclusive growth on the continent, opening up new opportunities for aspiring Africans.
Inclusive growth through technology
It is evident that from financial services to education, healthcare to transport, technology can be a key enabler in ensuring the benefits of Africa’s economic development are felt by all. There are four factors that are critical in enabling the growth in of the inclusive digital economy: the first is improved access to the internet.
Without access to mobile internet connectivity, the digital innovation that makes products and services more affordable to the majority remains out of reach. Approximately only one-third of Africans currently have access to the internet.
This issue is, fortunately, being addressed. Internet penetration in Africa has grown to almost 30% from just 11% five years ago. Internet bandwidth on the continent increased by 41% between 2014 and 2015, according to research from TeleGeography, with the growth being driven by the increasing prevalence of 3G and 4G connectivity.
The second prerequisite for enabling inclusive growth through digital innovation is increasing access to smart devices. Getting the right devices into the hands of Africans is crucial to ensuring access to opportunities. Here too we are seeing significant progress. The number of smartphones across Africa has almost doubled to 226 million over the last two years, according to the GSMA, as entry level prices are falling rapidly.
Another key factor for inclusive growth is reducing the cost of communication. The majority of Africans will remain unable to access digital services if they cannot afford data bundles or voice calls. But with data prices falling across the board and OTT services such as WeChat and WhatsApp enabling cheaper communication, this issue too is being addressed.
The fourth factor is reducing the cost of creating technology solutions. Whereas in the past the development costs of a mobile or web application would have been unaffordable to many digital entrepreneurs in majority markets, thanks to lean methodologies and open source platforms like GitHub the process is now simpler and cheaper. This drop in the cost of technology has created opportunities for the development of more innovative applications to meet African needs.
Africa’s inclusive digital future
There are many reasons to be positive about ‘Aspiring Africa’ and the impact of the digital economy.
The continent is brimming with the energy and passion of a young generation of ambitious innovators and entrepreneurs. And Africa is the youngest continent populated by digitally savvy and creative Africans that are keen to grab the opportunities that the digital economy creates for them as economically included citizens. The widespread emergence of tech ecosystems across the continent is supporting a rapidly growing number of increasingly impressive startups and innovative solutions. The increased accessibility and falling cost of relevant services through internet-enabled smart devices, is putting these innovations in the hands of the young and aspiring African mass markets.
These innovations are changing the lives of the average African byte by byte, day by day. As the majority of Africans enter the digital economy, technology innovations are playing a pivotal role in creating the inclusive growth story that is changing the face of the continent. Our firm invests in many technology innovators. Working with these passionate young entrepreneurs on the ground on a daily basis, it is hard not to be optimistic about the inclusive digital economy that is taking shape in Africa as we speak.
Bizcommunity
by TheLuxe Africa™ | Jan 14, 2017 | Business
Laura MacLean and Michael Burgess of Holman Fenwick Willan assess what the future holds for lawyers and their commercial clients in Africa in the New Year.
With Africa’s leading economies being resource led there can be no doubt that the hammer blows presented by one of the steepest falls in commodity prices as well as the oil price collapse have hit all leading markets hard. Now, the real question for the world’s second largest continent is whether 2017 will mark the year that governments and business across the continent shake off these setbacks, with a stabilising oil price and other commodity prices rebounding.
This article looks across a number of key sectors of African economies and considers the outlook for 2017.
COMMODITIES
2017 may well be the year commodities markets turn around from recent years of poor overall performance. With the World Bank raising its 2017 forecast for crude oil prices, and gold prices looking to hold or gain consistently, the potential advantage to African economies is clear -Africa is a resource-rich continent, from crude oil, coal and iron to gold, copper and many other precious and minor metals. But there remain significant questions including whether Africa can overcome the challenges it has faced, such as supply chain consistency and foreign exchange restrictions.
There has already been significant investment in the African economy by a number of the major trading houses. However, poor infrastructure and other issues have also caused some projects to falter. Consistent, reliable supply chains will be necessary if there is to be a genuinely significant jump in production of, and revenue from, African natural resources.
Whilst newcomers to the commodity markets have a more robust appetite for risk than some of the more traditional players, it is yet to be seen whether there is sufficient liquidity in the markets as a whole, and sufficient confidence in pricing, to justify the level of investment which will be required to overcome these challenges.
Doubtless for the strong-minded, there are opportunities to be taken, but sound analysis and management of the legal and other risks inherent in opportunities is a must.
OIL AND GAS
The African oil and gas industry has suffered considerably since the oil price slump in mid-2014: low oil prices have resulted in a cut in exploration and exploitation activities causing considerable delay, abandonment or cancellation of projects – as has been seen across the globe. Offshore projects have been hit especially hard, for example, in Nigeria, Angola and Ghana.
However, brighter days may lie ahead. If the implementation of the OPEC production cut can be combined with improvement of regulatory frameworks, as it is hoped will be the case, the much needed investment in the sector across the continent may return.
The firm commented on the progress made in East Africa towards reforming the oil and gas sector’s legislative and regulatory framework in our previous ALB article East Africa modernises its upstream oil and gas sector.
Reforms anticipated in South Africa and Nigeria are also awaited with interest. If pursued, such reforms could lead to the separation of oil and gas regulations from mining regulations in South Africa and increased certainty with regard to the sector’s regulatory regime in Nigeria through the passage of the Petroleum Industry Bill into law.
Optimism in 2017 for the industry in Nigeria, historically Africa’s biggest oil exporter, is enhanced by a reduction of security concerns.
Investors who have previously considered postponing ventures in the country will be encouraged by the government talks with militants to end crude pipeline attacks. Over several months in 2016, these attacks contributed to seriously reducing Nigeria’s output by 700,000 barrels per day. It is worth noting, however, that security remains a concern for investors across the continent.
CONSTRUCTION
Significant growth in demand for major infrastructure spending is expected in 2017, particularly in the renewable arena, as well as spending on conventional energy, airports, oil and gas and road infrastructure. This increase in demand will, however, face a number of significant economic and structural challenges.
The continent remains subject to domestic price inflation, as well as pressure from the recent low commodity prices and continued inadequate foreign exchange availability, which were touched on at the beginning of this article. These factors are highly likely to impact on project implementation and progress throughout the year. Additionally, the cost of tendering for projects is likely to remain high, due to lengthy tender processes resulting from inexperienced teams of government and quasi-government entities procuring projects.
Whilst many government agencies may not be geared for the anticipated increase in construction activity, (which may in turn result in continued bureaucratic problems for contractors, particularly in relation to the applicability of VAT, withholding tax and import duties to construction works and the ease of obtaining the required construction permits), it is evident that the appetite for work is there.
What remains to be seen is whether the construction industry’s enthusiasm for certain sectors, such as oil and gas and ports and terminals, is reflective of a general increase in willingness to do business on the continent.
Here again, there are opportunities for major infrastructure work for those who are able to take the time to analyse the risks, build the relationships and work through the issues.
For example, there is progress which Tanzania and Uganda are making with plans for construction of the 1,443 km Hoima-Tanga crude oil export pipeline (due for completion in 2020), the potential modification of the Tanzania-Zambia 1,710 km Tamza crude oil pipeline (or construction of a parallel gas pipeline) and the anticipated comprehensive upgrades to the Tanzania-Zambia Railway.
The railway network is also receiving a substantial boost in West Africa with the construction of a 3,000km long railway connecting Benin, Burkina Faso, Niger, Ivory Coast, Ghana, Nigeria and Togo. The project is set to complete in 2021.
PORTS AND TERMINALS
Opportunity in Africa in the ports and terminals sector is rife. Already at the start of 2017, Ghana opened a public tender for the development and operation of a new integrated container and multipurpose terminal in the port of Takoradi. Similarly, South Africa has requested proposals to develop a new terminal at Port Elizabeth and Kenya has launched the construction of a USD 3.4 million cruise ship terminal at the port of Mombasa in order to grow the country’s tourism revenue.
Notably, the Nigerian Export Processing Zones Authority has also granted a licence to the USD 2.5 billion Badagry Free Trade Zone and mega port project, marking a milestone in its development.
River ports and inland rivers to sea transport networks are another, often overlooked, area of potential growth. These require far less investment than maintaining road and rail networks and can be of particular use when cheaply transporting mining produce from isolated areas to the coast.
Competition in Africa is rising with both international shipping lines and terminal operators looking to increase their holdings. Pacific International Lines recently announced it wanted to invest in Africa and was considering terminals in Nigeria and Tanzania. All these recent announcements indicate that 2017 is set to be an exciting year in the ports and terminals sector and demonstrate the availability and willingness of foreign investors to engage in projects where the environment is right.
SHIPPING
For the maritime sector, security has also been an issue. The release of 26 seafarer hostages in October 2016, the last remaining victims captured during the darkest days of the Somali piracy era, represented a symbolic victory in the fight to eradicate a peril that has plagued the Horn of Africa for nearly a decade.
Whilst progress has been made, security issues remain a constant threat to new investment on the African continent. The significant reduction in piracy off the East coast gives more confidence to vessels calling at North and East African ports, especially Mombasa and Dar es Salaam, and we may yet see a further contraction of the High Risk Area in the Indian Ocean in 2017.
In the Gulf of Guinea, security also remains a relevant issue. Marine kidnap for ransom is as prevalent as ever with the International Maritime Bureau reporting 34 kidnapped seafarers in 2016. The challenges of improving stability and security to secure outside investment will certainly remain in 2017.
OVERALL OUTLOOK
A new year is a time to be optimistic and we hope that this optimism bears fruit in increased and enhanced business opportunities across Africa. It is important to note, however, that some of the countries where the best opportunities lie have challenging business environments.
With anti-corruption measures still being a work in progress in some cases and some bureaucratic hurdles still existing, working closely with local advisors and experts with an understanding of industry norms is the best advice to those wishing to invest.
The authors wish to acknowledge contributions from Sarah Taylor, Richard Booth, Richard Neylon, Matthew Gore and Alex Stoughton, all of Holman Fenwick Willan, to this article.
Source: http://www.africanlawbusiness.com/news/6987-2017-what-lies-in-store-for-africas-key-sectors
