Why Africa is attracting private-equity investors
Thirty years ago, rock star Bob Geldof helped raise awareness of famine in Ethiopia. These days, the former front man for the Boomtown Rats is on the lookout for investment opportunities in the African country and elsewhere in the region.
The the 63-year-old knighted by Queen Elizabeth II for humanitarian work now heads a $200 million private-equity firm called 8 Miles, one of growing number of foreign investors taking a shine to Africa.
"The potential rewards in Africa are far greater than anywhere else," Geldof told The Wall Street Journal.
A plethora of economic and demographic trends that underscore Geldof's point. According to the World Economic Forum, for example, Africa's working-age population is expected to double to 1 billion in the next 25 years, topping both China and India.
The region's economy is expected to grow by about 5 percent this year, well above the 3 percent increase economists expect for the U.S. African consumer spending is forecast to hit $1 trillion in 2020, including $200 billion for discretionary goods.
"The private equity model is suited for Africa," Amadou Sy, director of the Brookings Institution's Africa Growth Initiative, said in an interview.
The investments should appeal to companies who might have qualms about the corporate governance practices or the regulatory environment in a particular country, Sy said. "You have a seat at the board; you can monitor the operations very closely."
Blackstone Group (BX), one of the largest U.S. private-equity firms, last year said it would form a partnership with Africa-based Dangote Industries to invest up to $5 billion over five years in energy infrastructure projects in sub-Saharan Africa.
KKR & Co. (KKR), a rival firm, last year confirmed it had invested in Ethiopian flower company Afriflora, its first deal on the continent. And The Carlyle Group closed its first fund targeting sub-Saharan Africa in 2014 after it raised $698 million, $200 million above its initial target. It has invested in Export Trading Group, a supply chain manager headquartered in Tanzania and Mozambique-based logistic business J&J Africa.
According to the African Private Equity Data Tracker, deal activity in 2014 was $8.1 billion, the second highest on record. More than $34 billion in transactions have occurred in Africa since 2007, including the $2.6 billion raised by IHS, a Nigerian cell phone tower company, in 2014. The Ebola outbreak and the decline in oil prices have hurt the region's economy this year.
U.S. companies have been slow to recognize the opportunity in Africa, although companies such as General Electric and IBM (IBM) are among those with operations there, according to a 2014 report from the U.S. Chamber of Commerce.
"The bilateral trade relationship between China and Africa amounted to $210 billion in 2013," the chamber said. "By contrast, the United States and Africa conducted just $85 billion in trade last year. That's not nothing -- but it could be a lot more!"