1. Who is investing in Africa today?
Whilst heritage and familiarity have made Europe a natural source of African investments to date, established investment corridors to Africa are giving way to new capital flows today.
Europe: Africa's biggest investor for now
Of the world's major investment corridors, that between Europe and Africa is the most robust. Driven by established cultural links and aided by minimal time-zone differences, European investors of all profiles are the key sources of today's inflows into Africa. On the portfolio investments side, European pension funds have long-established links with the region's leading economies; and on the direct investments side, Europe's sizeable Development Finance Institutions (DFIs) have been providing funding and scale to Africa's impact and small-cap funds for many years.
Today's North American investor seems to be standing by - with direct / private equity investors seemingly more reticent to invest in Africa than their portfolio-investor peers. Faced with complex currency risks and challenging macroeconomic environments, some North American investors see Africa as a potential diversification play, whilst the majority (66% of North Americans) continue to stand on the side-lines.
Importantly though, intra-African flows are not only growing but also changing shape. Historically, foreign direct investment (FDI) flows from South Africa into the rest of the continent have made up around half of investment flows (roughly equal to those of European investors) - but the last few years have seen this percentage increase significantly, to around 80% of inflows. Africa is increasingly self-sustained, particularly during times of stress.
More than one-third of C-level decision-makers are looking to increase their African investments
76% of global investors could see their African investments grow
Although Africa-bound investments have yet to recover to their pre-pandemic levels, the potential upside for global flows into Africa is significant, with 76% of investors potentially growing their investments into the region in the near future.
If African investors are divided into 3 broad groups, those investing into Africa today make up around 34% of total. That almost no investors are planning on exiting the region entirely and that only 10% have already reached their full allocation to Africa is a great indicator that regional flows are building on solid foundations.
Owing perhaps to the challenges of the pandemic and the withdrawal of investments back towards home-markets globally, the second group of investors (those waiting to enter the market) is smaller. At only 8% of the total, these investors are mainly intra-Africa investors looking to launch incremental funds alongside existing platforms - but their potential impact on flows is nevertheless positive.
Most strikingly, those preparing to begin investing in Africa make up a full 44% of global respondents - underlining a significant but hitherto silent Africa community around the world. Even allowing for the fact that many of these investors could have been 'learning up' on Africa for decades, the sheer size and volume of this group is cause for great optimism.
Add to this the strong intent to grow investments amongst the C-suite and the story becomes very real. 69% of C-level managers in Asia-Pacific are currently invested and plan to invest further in Africa, as are 38% of their European peers and 30% North American peers - meaning that more than one-third of decision-makers are looking to increase their African investments. Unfortunately their operations, compliance and risk colleagues don't currently share this enthusiasm, with 80% of European respondents and 90% of North American respondents having no plans to invest - showing clearly the importance of investor education in the Africa dialogue.
Nevertheless, the world is clearly watching and ready to act on Africa.
The only question is why and when they will take their first step.
African investors are in for the long-term
Across the world, the largest source of Africa-bound investments are the world's largest pension, sovereign funds and DFIs.
Similarly to other emerging markets (in China, for example) these investors have long-held positions in local companies, with a long-term investment horizon that stretches well beyond any single economic cycle. That around 40% of inflows into Africa are driven by these institutional investors is another indication of stable foundations - with short term considerations such as pandemics, short-term policy changes or swings in investor sentiment unlikely shake investor interest or investment levels.
Importantly , those managing collective investment vehicles (including mutual funds, ETFs and GLP/LLCs) also make up between one-fifth and one-quarter of investors - most of all in Europe.
Whilst some of these flows are undoubtedly on behalf of institutional investors (i.e. pension funds using ETFs as a low-cost proxy for directly managed portfolios), this does indicate a continuing appeal of African markets amongst European wealth and retail clients - who invest either for their impact investment strategies or to simply follow potential returns in high growth African markets.
That these investors choose to access Africa through funds (rather than through managed accounts or through direct exposures) is no surprise.
Africa as an ESG destination
Most global investors would call Africa a 'high risk, high return' region - similarly to many frontier and emerging markets around the world. Indeed, investment returns are the #1 driver for investments into Africa amongst almost all profiles of global investor, underlining the critical risk/reward equation for investors looking at the region.
But there's more to the Africa story than quick returns - and not everyone is looking solely at their portfolio returns as an indicator of performance.
Across Europe and Asia-Pacific, the role of Africa as an ESG destination is fast becoming clear. As growing numbers of (institutional) investors begin to view their investment portfolios through a 'green' lens, African investments are clearly becoming more important to global investors' portfolios. In Europe, ESG is only narrowly less compelling than investment returns as a driver for African investments (scoring it 3.8/5 as a driver, versus 4/5 for investment returns) - whilst (the smaller number of) Asia-Pacific investors see ESG as the single most important reason for investing into Africa. As one specialist highlighted, "it's easier to good when you're investing into Africa than it is elsewhere" - as many plain-vanilla investments can carry significant financial inclusion, education, health and green benefits.
Interestingly though, the ESG appeal seems to diminish with investors' AUM. For smaller single-theme funds (<$5 billion in AUM), it is the second key driver for investments - Perhaps due to higher numbers of impact investing specialists in the region. For larger funds (>$5 billion in AUM), this sharp focus is replaced by a desire for investment diversification and a need to follow leading index providers (against which many active and passive portfolios are benchmarked).
"It’s easier to ‘do good’ in Africa than in the rest of the world. A coal plant in Africa is good because it generates employment, financial inclusion, etc. But in the rest of the world it would be a disaster!"
For Africa, the future is fintech
The days of viewing Africa as primarily a commodities / extractive natural resources investment location are over. Africa has become a fintech region primarily, for foreign and local investors alike, ranking technology as the number one target sector for investments. The Southern African Venture Capital and Private Equity Association (SAVCA) have seen foreign direct investment in African Fintech grow by 70% in the last 3 years.
But this is about more than financing small, tech start ups. To support Africa's digital future, we see inbound investments now directed towards across ‘infrastructure’ and ‘telecoms’ sectors, as global investors support the build out of Africa's digital infrastructure.
Not everyone is there yet though. Similarly to ESG, the appeal of fintech and digital infrastructure is significantly weaker amongst the largest investors into Africa (>$20 billion in AUM) - as larger and more conservative funds continue to focus on natural resources and banking stocks as the mainstay of their Africa portfolios.
Importantly though, North American portfolio managers' strongly positive attitude towards the digital economy (versus a more balanced view in Europe and Asia) bodes well as a potential driver of growth for the America-Africa investment corridor.