The most recent data from the UNCTAD World Investment Report shows that foreign direct investment (FDI) into Africa was down 21 percent in 2017 compared to the prior year. The decline is attributed primarily to lower commodity prices. More diversified exporters such as Ethiopia and Morocco fared better than those countries that are more dependent on commodity exports. Recently, commodity markets, particularly oil, have rebounded suggesting better macroeconomics for many countries which should improve the FDI numbers. We will know things have changed for the better when more economies look like Ethiopia and Morocco and the ability to attract investment is not tied to commodity prices.
In a recent post on emergingmktstories we addressed the need to encourage high value trade and investment in Africa and to discourage unnecessary imports such as used clothing. It is especially important to finance the growth of the African private sector. This includes startups, established companies, and greenfield projects. These companies have the greatest potential for wealth generation and job creation. Companies in high value-added sectors like manufacturing and agro-processing import tools and machinery—items in which US companies are competitive. In other words by investing in African high value industries we create customers for US exports and strengthen trade relationships. In addition, the better jobs these businesses create would result in potential customers for American companies.
HOW AFRICA CREATES VALUE
Examples of high-value industries include:
Agribusiness. Investment opportunities exist at all stages of the agricultural value chain. Investors looking for some combination of growth, impact and disruption tend to prefer downstream businesses such as processing, as well as those inputs that support agribusiness such as equipment finance and cold storage.
Possible investors: DFIs, Private equity, Impact investors.
Manufacturing. Investors look for large and growing markets, either for export or FMCGs (Fast Moving Consumer Goods) in the domestic market. They also seek reliable, cost efficient processes that meet international quality standards.
Possible investors: Private equity, off takers in the supply chain with government DFI support.
Minerals Refining. Most African countries recognize the need to develop refining capacity in order to make the most out of their mineral resources.
Possible investors: Multinational refiners. Private equity
Startups. Successful startups bring innovation and increased competitiveness to African economies. In addition, their rapid growth creates wealth and jobs. Such companies also have the potential for social impact by addressing some of Africa’s most urgent problems. We have previously discussed startup financing issues in this blog. We can now include impact investors as part of the African startup ecosystem.
Possible Investors: Venture capitalists, Angel investors, Impact investors
PROMOTING VALUE CREATION IN AFRICA
Those of us in what we’ll call business support organizations—advisors, development finance institutions, international development agencies and others in the business of stimulating Africa’s private sector should promote the conditions that make African companies attractive to investors. For now, let us consider two key factors where we can make a difference:
I. Reliable cash flow.
It is the most obvious requirement but often overlooked in presentations to investors. Investors want a clear demonstration of the source of cash. This is often accomplished by integrating into the supply chain of a large customer. A contractual commitment from such a customer enables the company to obtain not only long term investment capital but also lines of credit and other forms of working capital that fuel day to day operations.
For an agribusiness deal the commitment might be an off taker agreement from a wholesale buyer of the output of a processing plant. Such a commitment not only provides cash flow, but also validates the business model, giving evidence of a growing market for the product.
Similarly, African manufacturers or refiners would look to supply parts or other inputs to a manufacturer. Such companies might also ship finished goods to a large retailer like Walmart or Movenpick.
Depending on the needs of the business, support organizations can help African companies succeed in the supply chain in several ways:
- International Exposure – Connecting the company with global companies who could be potential customers. Providing exposure in their industry via conferences, exhibitions and trade shows.
- Technical Assistance/Quality Management – Making resources available to ensure that the company is operating at international standards.
- Financial Management – The ability to provide sound financial information is critical to not only keep investors happy but also give management the data they need to effectively guide the company.
- Impact measurement – Many African companies are capable of significant social impact whether or not they explicitly brand themselves as social enterprises. Many investors have their own proprietary impact measurement methods, often based on the UN Millennium Development Goals or the Global Impact Investor Network’s IRIS methodology.
In addition to steps noted above, business support organizations can also support startups:
- Business model refinement – Helping management understand their strengths in the market and how to achieve scale.
- Business planning – Telling the story in a clear and concise manner that shows the source of investors’ returns.
- Impact measurement – Many of today’s startups consider themselves social enterprises and therefore impact measurement is an even bigger priority than for most other companies.
Everyone wants a great business model in a large and growing market, but people are necessary to turn that business model into financial and social results.
- Professional Management.
Investors are always interested in the capability of the people running the business. They want to feel comfortable that there is a management team to execute the plan they’ve come to believe in. Their capabilities are developed through a combination of training and experience.
- Sound governance.
Strong managers and directors help the company establish a clear set of rules and procedures that give investors and other stakeholders confidence that the firm will deliver on its promises.
- Competent staffing.
Well trained personnel in engineering, accounting, marketing and other functions are critical to the performance of the company.
Business support organizations can partner with workforce training firms academic institutions and professional organizations to help enhance management and staff quality in African companies.
BUILDING BANKABLE STARTUPS
Startups and early stage companies are something of an exception since venture capitalists are often more interested in the disruptive characteristics of the company. Investors in these companies understand they have accepted a higher level of risk and therefore expect higher returns as well. That said, there is nothing like a signed purchase agreement to validate the business model and increase equity valuations.
We urge American business and policy makers to be present on the African continent to work with DFIs and with African business to build long term partnership to benefit American and African citizens, businesses, and governments.
Darnley Howard is a partner at PAN Diaspora Capital Management. PAN Diaspora Capital Management is an organizational partner with the Initiative for Global Development for the Advanced Executive Management Program. The Roadshow will provide high level training for senior executives and create a forum for American and African businesses to connect. For more information, visit https://igdleaders.org/