The state of investing in Africa was the subject of a panel convened last Thursday that featured prominent venture capitalist Alan Patricof along with World Bank veteran Obi Ugochuku and WPA banking expert Arjuna Costa. Moderated by Columbia professor Paul Tierney, the group discussed their views on the present state and future outlook of for-profit investing in the emerging markets of Africa.
Mr. Patricof, the founder of venture firm Apax Partners, Inc., related his own experiences in the mix of raw potential and tremendous obstacles that Africa offers the private investor, setting aside the more developed South Africa. “I get the sense we are in a very positive decade for investing in Africa,” said Mr. Patricof.
At the same time, he cited a lack of infrastructure, stability, and trust as the leading factors currently hampering further development. “Africa is a very difficult place to operate… the infrastructure in most places is non-existent,” he said. “When people can start trusting the local environment, when they trust the legal system…I think we can see opportunities.”
For private financial investors, especially funds with their finite investment periods, it remains difficult to assure appropriate exit opportunities in the African market. Unlike the U.S., where a successful company might be able to choose between a public offering and multiple potential buyers, Africa has “virtually no exits,” said Mr. Patricof.
Mr. Ugochuku has been involved in emerging markets via his work at the World Bank. He noted that for businesses not based on export products such as oil and minerals, the lack of infrastructure and the rate of inflation represent system problems across the continent. Heavier government involvement further complicates the African business landscape more than U.S. markets.
At the same time, the opportunity is enormous, said Mr. Ugochuku. “The average U.S. household size is 2.5 persons while the average African household has 6,” he said. “If you empower these people, think of all the benefit that would be derived.”
Mr. Costa’s focus has been on the development of commercial banking in sub-Saharan Africa and other emerging economies. One future investment model he cited was the creation of commercial micro-financing programs with the scale necessary to become profitable enterprises. These types of small scale credit facilities have been viewed as a critical step in helping small business ventures obtain seed capital for basic equipment such as tractors, tools and supplies.
During the question and answer session following the panel’s formal remarks, Mr. Patricof extended the issue of infrastructure beyond physical and technological requirements for business to include the problem of finding skilled management as a business owner or private investor in Africa. “What’s needed is skilled expertise – skilled management. Someone with a skilled team could pick their shots.”
Prof. Tierney, the moderator, noted that although there has been private investment into African nations, much of it has gone into “extractive” industries such as oil drilling and mining, rather than businesses that develop the overall economic status of the nations. A key external roadblock, he said, was the trade restrictions imposed by many developed nations on the exact kinds of products that emerging nations are most capable of producing. “You can grow anything in Uganda,” said Tierney, “but you can’t get it into Europe or the U.S.” due to restrictions on agricultural imports.
The role of foreign aid and subsidized loan programs was not viewed by the panel as a tremendously positive influence on the economic development process. Not only did they have their doubts about the impact of foreign aid, but they also related experiences where they saw potential foreign private equity investments squeezed out by the availability of subsidized lending. African entrepreneurs choose a much more limited business scope rather than giving outside investors partial stakes in their enterprises.
A mix of changes in global trade practices as well as an increasingly stable local environment will be the key to the future of Africa’s development, concluded the panel. Said Prof. Tierney, “it’s about admission to the game... Consumption is in the U.S. and Europe, [those markets] have to let the products in so that Africa can play the game.”
“You can be a great Columbia Business School graduate and go to Africa,” said Tierney, but “you can’t be a successful entrepreneur on a large scale without a worldwide market.”
The Investing in Africa Panel was organized by the Africana Association, a new club centering on bringing African awareness to the Columbia Business School community, in partnership with the Private Equity and Venture Capital Club.