Why Investing in Africa Should Be Part of Every Fund’s Strategy

Africa, often termed as ‘the last frontier’ in the global market, presents an alluring combination of vast untapped potential, diversification opportunities, and high returns on investment. As we move deeper into the 21st century, investing in Africa is not merely a choice—it should be a staple in every fund’s strategy. Here’s why:

1. Demographics and Urbanization: Africa boasts the world’s youngest population. By 2050, it’s predicted that one in every four humans will be African, with over 50% living in cities1. This demographic dividend offers a rapidly growing consumer base and workforce that can drive domestic demand and spur economic growth.
2. Rising Middle Class: Increased urbanization and education have led to an emerging middle class. The African Development Bank estimates that by 2030, most African countries will have a middle-class majority2. This equates to a burgeoning demand for a wider variety of goods, services, and financial products.
3. Rich in Natural Resources: Africa is endowed with 30% of the world’s mineral reserves3, from oil and gas to precious metals. This provides opportunities in extraction, infrastructure, and services related to the commodities sector.
4. Technological Leapfrogging: The absence of legacy systems has allowed Africa to leapfrog traditional development stages, most evident in the mobile banking sector. M-Pesa in Kenya is a classic example, which has revolutionized the financial landscape and inspired similar initiatives worldwide4.
5. Agricultural Potential: Only about 10% of arable land in Africa is being utilized5. With the right investments, technology, and policies, Africa can not only feed itself but also become a major food exporter, tapping into the global food market’s rising demand.
6. Improving Business Environment: Many African nations have been climbing the World Bank’s Ease of Doing Business rankings6, with reforms to enhance the investment environment. These efforts are reflected in the increasing foreign direct investments into the continent.
7. Emergence of Regional Markets: The African Continental Free Trade Area (AfCFTA) is an ambitious project to create a single continental market for goods and services, which will amplify intra-African trade7. Such integration can offer investors a more streamlined and expansive market.
8. Diversification: From a fund manager’s perspective, Africa provides an opportunity to diversify portfolios. African markets often move independently from more mature markets, which can offer a hedge against global economic downturns.
9. Higher Returns on Investment: Historically, investors in Africa have realized higher returns than in more developed markets. In part, this is due to the risk premium, but also because early entrants can capitalize on first-mover advantages in sectors ripe for innovation and growth.
10. Moral Imperative and Impact Investing: Beyond the economic rationale, investing in Africa can drive meaningful social and environmental impact. Given the global attention to ESG (Environmental, Social, and Governance) factors, African investments can be a way for funds to align their strategies with global sustainability goals and contribute to the UN’s Sustainable Development Goals8.

Conclusion

The promise held by Africa is undeniable. While there are risks, as with any investment, the potential rewards—in both economic and moral terms—are substantial. Funds that diversify into Africa not only stand to gain higher returns but also position themselves at the forefront of a continent on the rise. By including Africa in their strategy, funds can harness the power of demographics, innovation, and resources, while playing a role in shaping a brighter and more prosperous future for the continent.

References:

Footnotes

• United Nations, Department of Economic and Social Affairs, Population Division (2019). World Population Prospects 2019. ↩
• African Development Bank (2011). The Middle of the Pyramid: Dynamics of the Middle Class in Africa. ↩
• U.S. Geological Survey (2020). Mineral Commodity Summaries. ↩
• Suri, T., & Jack, W. (2016). The long-run poverty and gender impacts of mobile money. Science, 354(6317), 1288-1292. ↩
• Food and Agriculture Organization of the United Nations (2017). The future of food and agriculture – Trends and challenges. ↩
• World Bank (2022). Doing Business Report. ↩
• African Union. African Continental Free Trade Area. ↩
• United Nations (2015). Transforming our world: the 2030 Agenda for Sustainable Development. ↩