Enhancing Institutional Investments through Local Partnerships
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Enhancing Institutional Investments through Local Partnerships
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By Davis Mwania, Analyst, Botho Emerging Markets Group
February 20, 2023
Private capital investment flows (PCIF) in Africa are rising, having increased by 118% from $3.4B in 2020 to $7.4B in 2021. By the first half of 2022, the continent had recorded an increased cumulative deal value of $4.7B in one of the strongest half-years of private capital activity recorded. However, compared to venture capital, which accounted for more than half of PCIF in 2021, there seems to be a low institutional investor appetite, dragged by an outdated perception of African risk and the relative scarcity of data. Additionally, some institutional investors, who rely solely on the limited network in country databases, are vulnerable to a static and myopic view of the continent that may constrain their visibility on new asset classes.
To meet their data needs and curate appropriate investment strategies with a balanced view of the risks and opportunities in Africa, new institutional investors must understand that the continent is more resilient, digitized, and integrated than before, capture the unique sustainability investment opportunity compared to other continents, and build local networks beyond their traditional contacts.
Behold - Africa is evolving
Africa has what it takes — guaranteed future consumption, a resilient economy, increased digitization, and integration — to be the global hotspot of investment. Despite this promise, the African risk perception, particularly by major global institutional investors, appears to be rigid. Investors need to be conscious that the continent is the future of consumption, driven by the world’s youngest population and the highest urbanization rate. Household incomes and consumer and business spending are expected to increase alongside growing access to digital services, mobile technology, and the fourth industrial technologies, namely AI, the Internet of Things, and Machine Learning.
Africa’s political risks are also relatively improving, making it a safer alternative offering better risk-return balances than other developed markets. In spite of the current global economic meltdown, the region has demonstrated economic resilience with projections of higher growth in 2023 in the sub-Saharan region than in developed countries. As the continent embraces greater integration through the African Continental Free Trade Area (AfCFTA), transaction costs for domestic and international enterprises across borders are likely to reduce, which sets up the continent for greater trade and investment opportunities. Thus, investors need not be discouraged because of the perceived risks aggravated by relatively weak institutions and high macroeconomic volatility.
Bestow - better sustainability assets
Africa is ripe with investment opportunities cutting across traditional sectors,such as agro-processing, and emerging industries, such as technology. As investors increasingly become more sensitive to environmental, social, and governance (ESG) standards, they have the potential to reap significant rewards in the continent by applying sustainable models in the process of financing and implementing various projects. The level of impact investor activity in the African landscape is set to gain momentum as the globe pursues a net-zero transition by 2050. Compared to other continents, such as Europe, Africa has abundant natural resources, like solar and wind energy, and rare critical minerals supporting technological and low-emissions energy solutions.
Thus, Africa offers institutional investors the unique opportunity to build assets and products from scratch while adopting green models. These assets will, in turn, help develop sustainable growing economies which hastens the achievement of various sustainable development goals. For instance, the continent has great potential for developing green hydrogen because of its vast solar and wind power sources, potentially contributing to 10% of global demand. As the continent develops its towns and cities to meet the demand of its growing population, investors could contribute to the $280 billion needed to develop climate-resilient infrastructure across 35 major cities in Ethiopia, Kenya, and South Africa. Such an investment could deliver quadruple returns worth $1.1 trillion in 2050.
Boots-on-the-ground - local human and intellectual capital
To deepen engagement in the continent, investors need to build local networks beyond their traditional contacts by partnering with relevant African organizations. While having contacts at various country investment agencies and embassies is a great starting point, it could perpetuate the adoption of skewed risk perceptions of the continent. To gain a balanced view of the dynamics within the continent, institutional investors must widen their networks to include local individuals and organizations. Diversifying their knowledge centers beyond their regular sources could include plugging into existing cooperation between foreign and local investors or establishing institutional investor partnerships on the continent where they are lacking.
Additionally, institutional investors need to strengthen their partnership mechanisms with local ecosystem players, such as national policymakers, regulators, local research institutes, consultancies, and think tanks, to enhance their operations. Building a solid network with research institutions would create a strong understanding of national socio-political and economic development. Moreover, national actors produce data that could make it easier to understand the market gaps in long-term investment and help raise visibility in asset/ sub-assets among pension funds and long-term asset managers that may enhance investment decision-making.
Having a wholesome view of the continent would aid investors in reducing their perceived risks and improving their risk-reward calculus. As such, new institutional investors will approach the continent and the various investment decisions with clarity in terms of the prevailing risks and opportunities, thereby improving the level of institutional investor activity and increasing development on the continent.
This article is written by Davis Mwania, Analyst at Botho Emerging Markets Group with contributions from Valerie Pae, Head of Client Delivery - Institutional Client Business MEA at BlackRock