FDI Increasing in Sub-Saharan Africa As Investors Look to Diversify

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FDI Increasing in Sub-Saharan Africa As Investors Look to Diversify

With Western markets stagnant and the real possibility that Asian markets are overheating, many investors are looking to diversify their holdings, and Africa has become an investment hot spot in the last few years. FDI has been rising dramatically in Africa as investors look for the next big thing, with investors from George Soros to Carlos Slim either having committed funds or mulling investments. Carlyle Group LP (NASDAQ:CG), a Washington D.C. based investment firm with over 150 billion dollars in assets, is now looking to expand its African investments by injecting cash into Export Trading Group, a Tanzanian based Agriculture company.

FDI has been growing rapidly in Africa over the last few years, though the region still lags behind other emerging markets. In 2011 sub-Sahara Africa attracted only 5.5% of global FDI, however, the number of investments grew 27% vs. 2010.  An Ernst & Young poll of global executives reports that Africa’s perception is increasing, with 60 percent of executives reporting a positive outlook of Africa as a business destination. Many companies are looking to profit from Africa’s growing consumer base and the less intensive competition found in the region.

Carlyle Group LP (NASDAQ:CG) is now expanding its 500 million dollar sub-Saharan African Fund. The Blackstone Group L.P. (NYSE:BX) recently made investments as part of a 900 million dollar investment in a hydroelectric dam in Uganda. Through the 3rd quarter of 2012 private equity international investments stood at 700 million dollars, a small sum in the global context but an important stream of revenue for impoverished African nations.

These investment demonstrates two on-going trends. First, after decades of being all but ignored by private international investors, sub-Sahara Africa is now being viewed by many as a potential investment hot spot. Secondly, many investors are now looking to shift away from crowded and difficult to read technology and service sectors and to expand their holdings in agriculture companies. As incomes rise in Africa, consumption including food, should also rise.

In light of an unstable and hyper-competitive global economy, many investors are seeing commodity and agriculture based companies as safer investments. The thinking goes that demand for certain commodities, especially essential ones such as food staples, should remain strong even if the global economy declines or if certain sectors, such as technology, take a hit.

Further, agriculture companies tend to accumulate a lot of land which may prove valuable as land prices rise in Africa in line with continued economic progress. There is a long-going trend of agriculture and commodity based companies growing and advancing with their respective economies. Many companies in emerging markets, such as Malaysia and Brazil, successfully evolved into real-estate and property development companies. This occurred as land prices increased and their managers recognized higher profits in other land-based sectors.  Some examples include Malaysia’s Sunway Group, and Sime Darby, both of which have evolved from commodity based companies to multi-sector conglomerates.

The continued growth in investments and the African continent as a whole will depend largely on political stability. Investors have long seen potential in Africa with its low costs and vast wealth of resources, however, unstable political conditions have kept potential investors at bay. Now, with improving governance across the region and a general decline in violence and civil war many observers are hopeful that Africa can finally turn the corner. Whether Africa can sustain momentum remains to be seen but recent developments have largely been positive and investors are demonstrating a willingness to bet on the future in Africa.


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