Tim’s Take

Welcome to a new Africa

March 2011

For the last four years I’ve watched, learned, taught and invested in the idea that East Africa was in fact the next ‘big thing’ for investors and social change makers. My conversations have ranged from top level foreign policy makers in DC to a flower plantation owner in Ethiopia, hedge fund managers in London to micro-finance officers in Dar es Salaam. I’ve been amazed by how little a sophisticated wealth manager knew about the opportunities of the region and how much a simple resturanteur knew about managing wealth.

The disparity in my experiences and the information gaps they exposed, shed light on a place I could add value in this transformative process – translation. No, I don’t speak the dozens of languages in this region, but I do speak well to people from dozens of backgrounds, which is what I plan on doing for the foreseeable future. So a few like-minded individuals started the company, Renew Strategies, and we were off.

My message: Be a part of this story. The story of real life transformation, creation of an asset class, an economic hedge against new financial threats, an adventure challenging the efficient, low margin, routine lives we’ve made for ourselves in the West.

This column will tell those stories. We will journey through the macro and microcosms that shape the opportunities of this region. There will be anecdotal pictures, analytical criticisms, stories of hope and horror stories. I will continue to reference these broad spectrums because that is the first lesson of Africa, it is not just one thing. It is not one place, it is not one people, business does not work one way, rationales are not all linear. If you are a control freak, needing tidy problems with tidier solutions fitting into that square box, this conversation may not be for you. However, if you get excited to engage wicked problems that have challenged the most intelligent, big hearted, well financed, adventurous for decades, then this is your ride—step right up.

This is not your father’s Africa. The old way of engaging Africa continues to meet its detractors, largely fueled by increasing metrics showing little progress in social, economic, and health despite the estimated $1 trillion of aid to the continent. While there are plenty of good projects going around the continent, the ‘return on investment’ remains tragic, so it is time to consider a new approach. My message will preach a pro-business, double-bottom line (I’ll explain these terms in time), metric driven, risk loving, trial and error, end user crafted, pro-Africa, pro-West, and pro-anyone else looking to try new strategies to old problems.

Enough on that, we will all just learn as we go.

When I’d go to sell investment in Africa the conversation would start with much of the same excitement, potential I paint above. But after the heartstrings were engaged and the exotic pictures captured the mind, the conversation would become lean and speak to the wallet. While there are many facets to understand, the first real question would inevitably be – “what is my exit?” Everyone is familiar with the “ease” of putting money into a project, but the real fear and headache often come from determining how to get it back out.

Traditionally and in many cases currently, there are the variety of managed risk opportunities in debt and bonds, returning 15-20% with more straightforward payment exits. Huge, multi-lateral backed, private equity deals have been flourishing,  returning on average 30% this last decade through more complex multi-national company arraignments. Micro-finance has been a great success story, so much so that the original non-profits are finding intense competition from pure private sector banks. With local partners managing the micro payments, the investors debt revenue streams are easier to imagine.

But what about someone wanting to do more than a $200 loan but is not a sovereign government or billion dollar bank wanting to engage in the opportunity? This is where the real financial and transformative power of this continent lies. This is called the “missing-middle (class)” or Small and Medium sized Enterprises (SMEs). These backbone enterprises make up 70-80% of any developed economy.

In developed economies, investors are hoping for a big exit point, ideally an IPO. However, in Africa, IPO offerings have been a dream scenario that very very few would ever realize. Things are changing.

Currently there are around 29 exchanges, representing 38 capital markets, (some companies from a neighbor country without an exchange may list on an existing exchange). Some of these markets are established like the JSE in South Africa, created in 1887 and holding over 470 companies, while others are brand-spanking new, like Rwanda and their 2 listings.

Let’s look at Rwanda. It’s understandable after the chaos this country endured for the government to have a heavy hand in centrally administering assets. But as things have stabilized they are committed on moving these assets to the private sector.

The whole country was abuzz last month when a favorite national enterprise, Bralirwa, a beverage company with products in everyone’s fridge, announced they would be selling more than bottles to the public, they could now buy shares. This once little bev company had grown up, needing a USD 29 million capital raise. Within the two week sales period, Brawlirwa was oversubscribed by 175% at 136 Rwandan francs (approximately 15 cents US) a share.

A success, right? This investing fervor, about equal from domestic and foreign sources, certainly shows the appetite, but I was still concerned about the ability to manage the sale. Could Rwandan banks take such huge receipts, identify the share allocation structure, notify the owners and return the oversubscribed millions? Many involved in the much-anticipated Safaricom IPO in Kenya painfully recall the equally oversubscribed response, only to have nearly a year pass before people who did not get in on the shares saw their money again. That meant millions in losses for banks, individuals, and funds who had all their money sitting stale, gaining no margin for a whole year, while Safaricom ‘worked it out.’

Maybe because Rwanda and the capital raise are smaller, but indications appear to show the raise and the process are a success. My roommates and I have received our paperwork, shares are allocated, and the stock hit the market with an opening day share increase of 72%. (This will likely level off as the seller’s far outpaced the buyers since opening).

There are still kinks to work out and we will have to wait and hear from the institutional investors who are the most leveraged in this process to discover the whole story. But the experience has shown me that what was once a laughable additional option for an exit strategy is no longer so distant. While I’ll still look to structure investment assuming an IPO will not occur, it tells me something about the potential of this market and gives greater assurances for higher chance exits (local private sale, management buy-back, royalty models, mergers) to thrive in an economy that can also handle an IPO.

I’ll keep you posted as this story unfolds, but know that companies with real capital needs and real demand exist, and there is a hungry public willing to meet that need with their growing spending power. I don’t know if you’re seeing how these data points line up, but it’s a whole lot of capital opportunity in a place many think only have bracelets and mining to sell.

Tim Shirk is an attorney currently serving as an advisor to the Minister of Justice in Rwanda, advising on all government contracts with international parties. He continues to work on foreign direct investment opportunities with Renew Strategies based in Washington, DC. He can be reached at tshirk@renewstrategies.com.