London Summit 2015 - Creating an Enabling Environment for Growth in Africa (I)

Market Context & Challenges

• Africa faces a critical power generation deficit: Sub-Saharan Africa generates roughly 47 million people-equivalent power (comparable to Spain), while excluding South Africa, it drops to Norway's level.
• Panelists identify a "two Africas" dynamic: countries like Kenya, Morocco, and South Africa utilizing competitive renewable procurements versus nations where political survival drives short-term, unstructured development.
• Investment barriers include "ignorance" about the continent, the tendency to view 54 distinct nations as a monolith, and shallow analytical data from major Western financial institutions (e.g., Bloomberg, UBS, HSBC).
• Connectivity is a primary growth blocker; economic modernization requires moving beyond consumer tech (mobile usage) to enabling "creators" through industrial-grade internet and power.
• Agribusiness represents over 50% of GDP in most African nations but remains highly inefficient, creating a significant gap for modernization and export growth.

Capital Formation & Domestic Investment

• Nigeria's pension reform has grown assets from a 2 trillion Naira deficit to approximately $27 billion (5 trillion Naira) by shifting from defined benefit to a regulated, private-sector pay-as-you-go model.
• Kenya's pension fund system holds roughly $30 billion, though high government bond yields (20–22%) are currently crowding out infrastructure investment.
• TransCentury exemplifies domestic capital success, growing from $250,000 equity in 2004 to a $200 million balance sheet, listing on the Nairobi Securities Exchange, and issuing a $75 million Euro bond.
• Historical data indicates that the seven fastest-growing economies (including China) sustained 10% GDP growth only by maintaining domestic direct investment (DDI) at a minimum of 20% of GDP for 25 years.
• A structural solution proposed involves pension funds investing in government bonds that are explicitly channeled into infrastructure development, thereby maintaining asset safety while funding projects.

Risk Profiles & Investment Returns

• Contrary to the perception of high risk, a 30-year Moody's study of power project defaults shows Sub-Saharan Africa at 2.2%, significantly lower than the US/Global average of 9.6–9.7%.
• Private equity firms like Denim Capital and TransCentury are positioned to bridge the "development gap," funding projects from concept through to financial close, where operating assets attract significant capital.
• High returns are achievable (20%+ equity IRR) by addressing basic infrastructure needs, though investors must be prepared for 5–7 year holding periods rather than short-term exits.
• The "Achilles' heel" of African investment is identified as government fiscal discipline; excessive spending on recurrent expenditure (salaries, political favors) rather than capital expenditure crowds out private liquidity.

Sector Opportunities & Strategic Shifts

• Technology: Facebook is investing in rural access via satellite backhaul partnerships (e.g., UTELSAT) and hiring dedicated developer teams to foster local tech innovation beyond consumer apps.
• Real Estate: Nigeria faces an 18 million unit housing deficit, with recent regulatory reforms allowing pension funds to use retirement savings for primary home purchases.
• Infrastructure: Panelists argue power must be prioritized over roads; without electricity, industrialization, agriculture modernization, and job creation (critical for 20 million annual workforce entrants) are impossible.
• Innovation in Models: Successful entry requires "acting local," exemplified by Coca-Cola selling half-sized bottles for poor markets and telecoms adopting pay-as-you-go models for mobile users without formal addresses.

Government Relations & Policy

• Corruption and bureaucracy remain significant risks; one investor in Tanzania reported being owed over $100 million by state utilities, with power forced to remain on due to election pressures.
• Panelists advise investors to target "commercial" governments with international legal precedents, avoiding markets where political will is inconsistent or policy "somersaults" occur frequently.
• Recommendation: Avoid "government risk" by embracing technology and private-sector models (captive power, distributed generation) rather than relying on state utility purchases.

Forward-Looking Statements & Market Outlook

• Scott Mackin (Denim Capital) dismisses the "private equity bubble" narrative for Africa, citing increasing interest from US investors who are overcoming fear through due diligence on specific power needs.
• Abele Okobi (Facebook) emphasizes that long-term sustainability in Africa depends on industrial electricity to create a producing economy, not just a consuming one.
• Gachao Kuda (TransCentury) states that Africa is the only place globally where outsized returns are generated by executing "very simple" basic infrastructure projects.
• Ali Mufuruki predicts a "huge transformation" in electrification is already occurring, with Kenya connecting more households in a single year (1 million) than in the 40 years since independence.
• Consensus recommendation: Investors should "educate themselves" on country-specific risks, ignore the "gloomy" single-story narrative, and focus on structural, long-term value creation.