November 6, 2012

BusinessWeek on Africa's Frontier Markets

Last week Roben Farzad wrote a nice article on Larry Seruma's forthcoming paper, “Why QE3 will be a Boon to Africa’s Frontier Markets”, that you should go read (coming out soon).  The entire article has a lot of links to other articles and “a video” that make a compelling case of why Africa markets are likely to outperform as they benefit from capital flows, seeking higher yields and growth, into frontier markets.

For more information please contact Nile Capital Management at or 646-367-2820.
Nile Capital Management - We Know Africa: From Cairo to Capetown 

August 8, 2012

Summer Updates On Africa Markets

Recently, Portfolio Manager Larry Seruma of Nile Capital Management has been featured in articles from Reuters,, InvestorPlaceonwallstreet, and Investing Daily.

Ben Shepard of Investing Daily discusses the current state of various African economies and markets, foreign direct investment in Africa, and how global pressures affect African countries in “The Final Frontier of Investing: Africa”.

Tom Taulli of InvestorPlace looks at strong performers this year in "7 Surprisingly Good Funds in 2012".

Bill Hinchberger for looks at the growth of private equity in Africa in “Africa:  Private Equity – New Cash for Expanding Businesses”.

David Lindorff of onwallstreet looks at top performing emerging market funds in “The New Emerging Markets: Africa and the Middle East”.

David Randall of Reuters interviews various emerging market fund managers including Larry Seruma of Nile Capital Management and gets their strategies for stock picking in emerging markets in “How to Play it – Emerging Markets Now a Stock Picker’s Market?”

For more information please contact Nile Capital Management at or 646-367-2820.
Nile Capital Management - We Know Africa: From Cairo to Capetown   

May 23, 2012

The Street Notes Recent ‘Boost’ From Africa

A recent article from The Street notes the recent boost which investors have seen from funds which are invested in Africa and the Middle East, noting that many of the economies in these regions are ‘booming.’
The article highlights the fact that:
“Boosted by high oil prices, petroleum producers are enjoying some of the best results… In addition, consumer companies are achieving record sales as millions of people leave impoverished villages and join the urban middle class. In 2011, Sub-Saharan Africa grew 4.9%, and the World Banks says that the region should grow 5.3% this year.”
We at Nile Capital Management believe that this strong growth represents the ‘new normal’ for Africa for many years to come.  Given the dual economic drivers of natural resource demand and an expanding consumer class, we believe that the economic growth in many of Africa’s nations will remain strong. 
In addition, the article points out that:
“The recent strong showing of African stocks represents a big change from last year. Markets throughout the region plummeted early in 2011 as investors feared that the protests of the Arab Spring would spread and disrupt businesses. Stocks suffered again when the European crisis intensified in the summer, and investors lost their appetite for risky shares in the emerging markets. Lately the fears have dissipated as investors worry less about instability in Europe and the Middle East.”
2011 was undoubtedly a challenging year from a geopolitical perspective.  However, we continue to feel strongly that Africa’s growth trajectory remains unchanged, and that now is an excellent time to invest there.  In fact, it is interesting to note that the challenges that Africa’s markets saw in 2011 largely came from outside factors.  Despite that, growth in Sub-Saharan Africa in particular remained strong.
Finally, the article highlights a handful of opportunities which Nile Capital Management finds particularly compelling, especially from a valuation standpoint.  To read more about some of the value opportunities we see in Africa, please request a copy of our most recent White Paper “Digging Deeper into Valuations in Africa” from our research library.
For more information, please contact Nile Capital Management at or 646-367-2820.
Nile Capital Management - We Know Africa: From Cairo to Capetown

May 10, 2012

Brazilian Firm Announces Largest Africa-Focused Private Equity Fund To Date

In recent articles in Forbes and the Wall Street Journal it was announced that Brazilian investment firm BTG Pactual is launching the largest private equity fund to focus on Africa to date.  With  a $1BN mandate, the fund expects to invest in areas such as infrastructure and energy, and will be open to domestic and international investors alike. 

This announcement comes on the heels of similar interest from firms like Helios and Carlyle, who have recently raised $900MM and $500MM funds respectively to focus on the continent.  These and other funds are indicative of the growing interest amongst the investment community in opportunities across Africa, and have positive implications for the growth of many key businesses and sectors – many of which we follow as well.

For more information about investing in Africa please contact Nile Capital Management at 646-367-2820 or

Nile Capital Management – We know Africa: From Cairo to Cape Town

May 2, 2012

New York Times Highlights Looking to Frontier Markets for 'Next Big Thing'

A recent article in the New York Times ("Looking to Frontier Markets for Next Big Thing in Investing") has once again highlighted the opportunity which investors are noticing for investing in frontier markets in general, and Africa in particular.  The article notes that:

"The difficulty with investing in the next big thing is that it is often not recognized as that until after it has become a current or former big thing. Before its arrival, it tends to be seen only as a crazy, risky thing or nothing at all."

But also points out that:

"the case for the region and frontier markets elsewhere is precisely that they have just set out on the path to economic and social progress and still have a long way to go. That is the same journey made by the big emerging economies of today. It’s barely four decades since Chinese farms were decollectivized, for instance, and less than two decades since Brazilian inflation was running at more than 40 percent a month."

In addition, the article highlights the three themes which Nile Capital Management's team focuses on, noting that: 

"Whenever other investors decide to join them, there are three themes that fund managers expect to drive returns for years to come: growth of a middle-class consumer society, with all the products and services that are its trappings; production and export of natural resources; and development of infrastructure, including the transportation and communication networks required for the success of companies involved in the other two themes."

We would encourage you to read the article, which again can be found here.

For more information please contact Nile Capital Management at or 646-367-2820.

Nile Capital Management - We Know Africa: From Cairo to Capetown   

May 1, 2012

Nile Capital Management Featured on CNBC: Africa is "Single Best" Equity Region

Larry Seruma, CIO & Managing Principal, Nile Capital Management LLC digs deeper into investing in Africa in a recent CNBC interview. He explains the difference between the valuation matrix of Africa's vast resources and that of other large countries like Russia and Canada. He also tells us why he's positive on the continent.

Click here to watch the interview.

For more information please contact Nile Capital Management at or 646-367-2820.

Nile Capital Management - We Know Africa: From Cairo to Capetown

April 26, 2012

How Active Managers Can Maximize Opportunities in Africa


Over the past decade, an increasing number of investors have discovered the potential of investing in the smaller and less developed “frontier markets,” many of which have been developing rapidly into excellent growth opportunities. Although many of the greatest investment opportunities of the next decade will likely emerge from the frontier, these markets are often characterized by limited research coverage and low liquidity. However, investing in frontier markets offers a good deal of potential for investors who hope to increase their exposure to developing nations, including the majority of the African continent.

Once an investor has decided to increase his or her exposure to frontier markets, there are still a relatively limited number of ways they are able to invest. Although there are a number of index and exchange-traded funds which are designed to mimic the performance of stock markets, we believe that active stock selection and portfolio management is a key driver of success in frontier market investment. Index funds are often weighted towards larger markets and more liquid stocks.

We believe that there are a number of overlooked opportunities trading at attractive valuations which a more active approach will help discover. Active management facilitates risk management in a portfolio, while allowing investors to patiently invest in less liquid stocks, identify key investment themes and opportunities, and follow attractive catalysts. To simply invest in an index or exchange traded fund means missing many of the benefits a more active strategy could provide.

When you mix two hot investment trends, some investors assume you can cook up a recipe for success. 

Trend #1: The world’s frontier markets are being discovered by more institutions and individuals.
Trend #2: For the past decade, a growing number of investors have accepted the benefits of index funds and ETFs.

Putting the two together, wouldn’t it be smart to take your first steps “into the frontier” through index funds? As experienced active managers of investments in Africa, our answer is that it is not.

For reasons we will cover in this report, we believe Africa is one of the least crowded investment spaces on Earth, with wide-open opportunities for finding attractive long-term values. As active managers in Africa, our goal is to take advantage of the continent’s unusual dynamics and the unique characteristics of its 54 separate countries. As we will explain, index funds don’t have this freedom.

As more ETFs and index mutual funds emerge in Africa, we believe they are crowding into the same stocks, for the same reasons. These reasons have more to do with index fund structures and requirements than with Africa’s growth potential over the next decade and the companies that will drive it.

We believe the key to success in many frontier markets, especially Africa, will be a patient long-term horizon combined with local market resources and research and an active management strategy.

How Index Fund Choices Avoid the Frontier

For investors who want to “follow the crowd” into African markets, a few index fund choices have been launched. However, for the most part, they are heavily concentrated in Africa’s only two emerging markets (South Africa and Egypt) and lack broad exposure to frontier markets. For example:
  • The S&P Mid-East and Africa BMI Index recently held 138 stocks, with its largest country weightings in South Africa (86%) and Egypt (6%). It is tracked by the SPDR S&P Middle East & Africa ETF (GAF).
  • The Dow Jones Africa Titans 50 Index holds 51 stocks, and its largest weightings are South Africa (30%), Egypt (21%), Nigeria (15%) and Morocco (11%). It is tracked by the Van Eck Market Vectors Africa Index ETF (AFK). These two indexed ETFs are capturing investors’ attention and assets – gaining about $250 million in combined AUM since their launches in 2007 and 2008, respectively. However, what are their investors actually getting? The answer is mostly emerging market stocks that meet index and ETF criteria for size, free-float and liquidity. Therefore, the correlation between the above indices and emerging market index is high.The graph below shows the correlation between the MSCI Emerging Market Index and Market Vectors Africa Index ETF (AFK).
These two indexed ETFs are capturing investors’ attention and assets – gaining about $250 million in combined AUM since their launches in 2007 and 2008, respectively. However, what are their investors actually getting? The answer is mostly emerging market stocks that meet index and ETF criteria for size, free-float and liquidity. Therefore, the correlation between the above indices and emerging market index is high.

Like stocks, the price of an ETF changes throughout the day, and determining when to buy and sell will be determined by the bid-ask spread.  Most ETFs in frontier markets are illiquid and as a result investors often pay high transaction costs because of the wide spread.  These spreads are hidden costs that eat away at potential returns.  For African ETFs it is not unusual to see bid ask spread in excess of 5%.  For a large investor, the spreads will be higher, as large orders need higher buying prices and lower selling prices to be fulfilled.

In frontier markets, the structure of an ETF requires it to invest in the largest and most liquid stocks, so that authorized participants can effectively price and trade its shares. Thus far, investors have created liquidity only in a few frontier stocks of the best known and most thoroughly researched companies. The vast majority of investors who enter frontier markets through ETFs walk down the same narrow, well-worn path.

This trend was recognized in November of 2010 by one of the world’s most noted “contrarians,” Nouriel Roubini, Professor of Economics and International Business at the Stern School of Business. In a Reuter’s interview, Roubini was quoted as saying: “Fund managers should consider African markets such as Ghana, Kenya, Nigeria and Tanzania rather than chasing crowded emerging market trades elsewhere.”

In an April 2010 briefing, the global consulting firm Towers Watson evaluated 14 countries included in the FTSE Frontier 50 Index, which tracks the 50 most liquid stocks from an eligible universe of 23 frontier markets. Almost half (47.3%) of the index weight was in two Middle Eastern countries (Qatar and Jordan). Africa was represented by only an 18.6% combined weight allocated to just three countries – Nigeria (11.7%), Kenya (4.2%) and Mauritius (2.7%).

Towers Watson concluded: (1) “Many indices do not represent frontier markets particularly well”; and (2) “Frontier markets therefore seem more informationally inefficient, with any insight on a stock more likely to be unique and so more profitable.”

Although these comments are useful, we believe they only scratch the surface of differences between index funds and active managers in frontier markets. To help investors understand choices, Nile Capital Management has identified five Key Differentiators between passive and actively managed frontier funds. We believe Africa is an attractive region for identifying overlooked opportunities, and also for demonstrating how these Key Differentiators add value to globally diversified portfolios.

Five Key Differentiators

Undiscovered Stocks Trading at Attractive Valuations

Active managers increase their potential to outperform indexes when they can gain an edge in acquiring information. Although Africa is now developing modern communications infrastructure and methods, useful original investment research remains scarce. Large investment management firms won’t commit research resources to Africa until they have enough AUM to justify costs. This creates opportunities for firms such as Nile Capital Management who travel extensively across the continent, visiting companies and cultivating personal contacts and research resources.

We pay close attention to the quality of a company’s balance sheet and financial strength and in particular its management team. Because Africa’s national economic cycles tend to be short and dynamic, we look for managers who understand their local markets, can maneuver in difficult times, and have the ability to communicate with overseas investors. At times, we can identify capable management teams and attractive companies even in distressed markets.

For example, Zimbabwe has become a symbol of hyperinflation, resulting from government currency manipulation in 2007 and 2008. The Zimbabwe Stock Exchange remains tiny, with just 65 listed securities.

Yet, our “on the ground” research in Zimbabwe identified a company whose management team has consistently navigated through challenging times.  This company, Innscor Africa Ltd., has developed an efficient vertical integration of the nation’s food chain – from farms to snack foods. Although the company’s revenues declined when the local currency collapsed in 2008, its resourceful managers have doubled sales (measured in dollars) over the past two years, and the company has become an even more dominant part of Zimbabwe’s consumer economy. To fully appreciate the strengths and achievements of a company such as Innscor Africa, local market knowledge and resources are essential.

Risk Management

In most markets around the globe, active managers tend to outperform indices during stock market downturns. The reason is intuitive: active managers have more flexibility to adjust to recessions and market sell-offs. Index funds are “flat-footed” and can’t easily respond to scenarios involving rising risk levels.

We believe this difference is magnified in the frontier markets of Africa because: (1) economic and market cycles tend to be shorter than in developed or emerging markets; and (2) cycles are not highly correlated among the diverse markets of Africa. When risks are rising in one African market, they may be falling in others; and (3) low liquidity levels can make entering and exiting positions challenging, as liquidity rises sharply when sentiment is strong, but disappears equally quickly as the mood sours, often causing stocks to trade below fundamental value, which creates opportunities for skilled active managers.

As risk factors become more complex, the value of risk-conscious active management increases. Our risk-assessment process begins with a comprehensive quantitative macro-economic ranking of all 54 national markets in Africa. Our model helps to evaluate all important risk factors of frontier markets including political, regulatory, structural, inflation and transparency risks.

Sovereign credit ratings, which can be useful in evaluating risks of developed or emerging markets, have limited value in fast-changing frontier markets. Our model drills down into risk factors that are highly correlated to frontier market risks, such as debt-to-GDP ratios and changes in currency reserves.

For example, over the past few years, Nigeria ranked high in our model’s output because the country has taken advantage of its oil resources to pay down debt and increase currency reserves, which we consider a proxy for national revenues in Africa.  However, more recently the country reserves have declined because it is spending more money on infrastructure and a restructuring of its banking system.  As active managers, we can make timely shifts in our exposure to Nigeria.  By nature, ETFs are not nimble enough to adjust portfolios for such dynamic macro-economic changes.


Investors have the best opportunity to succeed in frontier markets when they have a long-term focus and are patient. The proof of that statement is the long-term performance in markets such as China and India, which would have been classified as “frontier” 20 years ago.

By definition, ETFs and other index funds put a premium on holding liquid stocks, and they are willing to pay a “liquidity premium” to own them.  ETF components must be able to meet a demand for immediate liquidity, if it arises, because share turnover tends to be high and liquidity drives investment flows.

When we identify an African stock that appears deeply undervalued, it’s rarely being followed by international investors. The investor base tends to be local, and we also know that local investors in these markets often need to sell stocks to raise cash. This dynamic, which does not exist in developed markets, can make undiscovered and undervalued frontier stocks even more of a bargain.

An active manager can take advantage of falling prices and low liquidity to enter attractive stocks strategically, and then hold them patiently until catalysts emerge. Index funds lack this flexibility.

Theme Identification

All over the world, investment managers attempt to identify and participate in themes. In the U.S., Europe and Asia, attractive themes tend to be well known and crowded. In Africa, they are relatively undiscovered and wide open.

One theme we are continuously pursuing at Nile Capital is the emergence of Africa’s consumer markets. Although the consumer sector tends to have smaller companies and less liquid stocks than the natural resources sector, we believe it represents attractive valuation and holds long-term return potential. As Africa’s standards of living rise and rural populations move into cities, demand will follow for many basic consumer goods -- including food, shelter, clothing and home appliances. We have identified companies with strong consumer franchises in several top-ranked African markets, and we currently are allocating about 30% of portfolio weight to this theme.

Another current theme we have identified is China Demand. To build new factories, high-rise office buildings and high-speed train systems, China requires vast amounts of raw materials that Africa can supply, such as iron ore. In recent years, China has launched an aggressive campaign of acquiring or investing directly in overseas mines, especially in Africa. This is helping to attract global attention and investment capital to Africa’s most productive iron ore mining companies.

In pursuing this theme, we also have selected companies that are deeply involved in extractive industries, even though they are not listed on local exchanges. Most index funds don’t have this freedom.

Conviction and Catalysts

Active managers are pursuing a variety of investment styles in frontier markets, including value, growth, and momentum. At Nile Capital, we believe in maximizing our competitive edge with a high-conviction, concentrated portfolio of stocks with attractive valuations and long-term potential. We also focus on identifying near-term catalysts that can trigger: 1) increased research coverage and international interest; 2) a more favorable competitive position; and/or 3) earnings improvement. Because frontier markets are dynamic, catalysts often emerge quickly and fly “under the radar” of large investment firms. Local research and informational resources are essential to capture catalyst-driven changes.

An awareness of infrastructure and consumer market developments in frontier markets can also help to spot timely opportunities. For example, 70% of South Africa’s GDP is driven by consumer consumption, and yet the country has a relatively low-skilled labor force, high unemployment and lack of adequate low-income housing. Supplies of electricity in South Africa are very limited and rising steeply in cost – by a projected 30% per year, on average, from 2010 through 2012. On the surface, this catalyst does not appear favorable for the country or its mining companies, which consume large amounts of electricity.

However, we also are seeing major commitments to upgrade the electrical infrastructure in South Africa and other growing economies, especially Nigeria. Several large-scale public-private development projects are underway or being planned, and they will generate power using fuels that Africa has in abundance including sunshine (solar), wind and natural gas. General Electric, the world’s largest electricity-generator, has supplied more than 100 gas turbines to Nigeria and is invested in major infrastructure projects in South Africa.

Since about 20-30% of total cost structure in these countries goes for electricity, increased generation capacity has the potential to greatly reduce industrial companies’ fixed costs and drive profitability. This example shows how in-depth research and hands-on management can find a silver-lined catalyst in what may appear to be an African cloud.


Clearly, ETFs are changing the way many investors view opportunities and participate in niche markets. They have created more convenient access to markets such as oil and gold, and they can be simple choices for adding exposure to emerging markets such as India and China.

In frontier markets, however, ETFs and other index funds may not be as good as they appear. They can be heavily concentrated in a few of the most liquid markets and stocks, including those best known to international investors, and they create “crowd momentum” that drives stock prices beyond intrinsic value.  They also lack the flexibility to strategically phase into emerging opportunities or identify off-the-beaten-track themes and catalysts.

Decades ago, today’s developed stock markets once had many of the same wide-open characteristics that frontier markets offer today. In those times, great active managers such as Peter Lynch honed techniques to leverage competitive advantages in high-conviction portfolios. As developed markets then grew more mature and competitive, and as Fair Disclosure rules dulled managers’ information edge, high levels of Alpha became harder to sustain year after year.

Africa is still risky and somewhat volatile, and is comprised of 54 distinctly different countries that have different economic cycles, growth drivers, and market dynamics. However, its stock markets have much in common with post-World War II America or Asia in the early 1990s.  There is no Regulation FD in African markets and probably won’t be for many years – in part because so few analysts are paying attention, and so little information about the continent is flowing among big investment firms.

We believe that investors will have the best chance to succeed in Africa when they have long-term commitment and expectations, diversify among countries and securities, and take advantage of experienced professional management with access to local resources and research.

For more information please email us at or call 646-367-2820

Nile Capital Management - We Know Africa: From Cairo to Capetown

April 9, 2012

Beyond Joseph Kony: Investing In Africa’s Future

Since its March 5 release on YouTube, the 29-minute documentary film Kony 2012 by Invisible Children, Inc., has gone viral around the world, capturing 100 million views in about one week. The film focuses on the group’s efforts to expose Ugandan war criminal Joseph Kony’s atrocities and bring him to justice. It has become an international rallying point against a brutal military insurgent, while also focusing global attention on continuing violence and repression in parts of Africa.
Although Joseph Kony is a relic of a 26-year war in Uganda and has spent recent years expelled and on the run, the ongoing legacy of the country’s brutal war continues. Poverty and unemployment remain high in many parts of northern Uganda, and poor infrastructure networks have been degraded by years of combat.  Thanks to the film, hundreds of millions of people are anticipating the day Kony is brought to justice, and there is growing awareness of the need for humanitarian efforts and charitable contributions to work on Africa’s challenges.
In the eyes of the developed world, Africa remains a continent full of entrenched and insurmountable challenges. But, as long-term investors in this region, this contrasts with what we see in our travels around the continent, as we witness its economic growth, abundant natural resources, and thriving public companies.
As investors in Africa, we see economies that have produced consistent Gross Domestic Product (GDP) growth over more than a decade, with promising potential for the future.  We have visited scores of successful home-grown African companies that are providing goods, services and jobs to an expanding consumer class. Other sectors are benefiting from a boom in exports of natural resources.
We also see a rising tide of interest from international investors who see opportunities to put their capital to work in a resource-rich continent that is home to over one billion people. We encourage those whose attention has been captivated by Africa in recent weeks to take a closer look at the region and perhaps they too will see Africa as we do: the next big global growth story.
Uganda Today: Abundant gas and oil reserves
One of the big investment themes in Africa today is infrastructure growth, including roads and bridges that will interconnect countries and hydroelectric projects that will greatly reduce the historically high cost of electric power. The infrastructure need for a continent as vast as Africa requires an enormous amount of capital. The good news is that this capital is starting to flow more freely into Africa from abroad.
For example, Uganda offers clear opportunities for increased investment in the oil and gas sector.  While much of Uganda’s territory has yet to be fully explored, the country has more than two billion barrels of proven oil reserves – an amount with the potential to economically transform the entire region. Northern Uganda, the territory Kony once dominated, is believed to contain an estimated five billion barrels of oil reserves, and these riches are attracting international expertise and capital. Uganda’s oil reserves are being developed mainly by three international exploration companies: Tullow Oil (U.K.), Total (France) and CNOOC (China).  Over the next three years, these companies combined are expected to spend $15 billion in developing Uganda’s oil industry.
Over the next decade, the projected investments in Uganda’s oil sector, as well as future revenues to be earned from the export of oil and related products, will dwarf Uganda’s current GDP of $17 billion and have a profound impact on every aspect of the country.  Already, the Ugandan government has pledged to invest income earned from oil and gas development into the country’s infrastructure network of roads, schools, and health facilities.
Uganda’s Children: The “demographic dividend”
Like most of sub-Sahara Africa, Uganda has positive demographics trends for supporting future economic growth.  The country’s present population of 33 million is projected to grow to 100 million by 2050, and young families will drive most of this growth; half of the current population is under 15 years old.  The “demographic dividend” of a large, youthful population supporting relatively few retirees, coupled with an abundance of natural resources, will propel long-term economic growth and productivity.  When Uganda starts to export oil in 2013, the country’s import bill will shrink, its cost of capital will fall, and productivity will increase as output-per-worker rises.  Although many African countries lack Uganda’s oil riches, we see similar cycles of opportunity emerging across several regions of the continent. This is one clear reason why a long-term investment in Africa is compelling.
Nile Capital Management: We Know Africa, From Cairo to Cape Town

For more information please contact us at 646-367-2820 or

March 2, 2012

Our Approach to Investing in Africa: Three Key Themes for Long Term Growth

Nile Capital Management’s investment team is dedicated to identifying and investing in compelling opportunities across the continent of Africa, and seeks to help investors share in Africa’s growth.  At NCM, we believe an active strategy will be the key element of success for anyone who hopes to gain exposure to Africa’s markets, and are confident about the value of our team’s expertise and selection process.  At our core, we are value investors who seek stocks where we feel the price is right.  However, we believe that Africa is an investment which requires a long-term horizon, and an understanding of the dynamics underpinning the continent’s growth.

When identifying opportunities for investment across the continent of Africa, Nile Capital Management’s strategy has three key investment themes.  These themes represent a broad set of opportunities for investors who seek a diverse exposure to Africa’s many markets and prospects for investment.  They are: natural resources, infrastructure development, and consumer growth.  Below we explain why we find these themes particularly compelling for many investors.

Natural Resources

To many investors, the natural resource endowments of many of Africa’s nations are the most obvious opportunity.  Africa holds a significant proportion of the world’s mineral reserves, including gold, and has significant reserves of oil and gas, and already plays a substantial role in the supply of many of the world’s key natural resources. As demand for natural resources continues to rise from the world’s emerging markets the world will increasingly turn to Africa – especially for energy and strategic and industrial metals. In fact, the U.S. National Intelligence Council estimates that 25% of the U.S. oil imports will come from Africa by 2015, and demand from China, Brazil, and other key emerging markets has and will continue to drive exploration and extraction across the continent.

In the coming years, Africa will continue to supply the rest of the world with a broad range of resources, from iron ore to oil. That quality is more important now than ever because the global supply of natural resources from current sources is becoming more limited. As emerging markets such as India and China continue to grow and mature, they will require the natural resources that fuel economic growth. As a result, African countries will continue to receive foreign direct investment for their resource endowments, which will be used to develop their economies.

Additionally, according to projections by the United Nations, in order to feed the world’s growing population global food production may need to rise by 70% over the next 40 years. Africa has almost 1.5 million acres of potentially suitable arable land that is not currently under cultivation, representing about 60% of the world available cropland.  As the globe’s population continues to rise, Africa will play an increasingly important role as a bread basket for the rest of the world.

Infrastructure Development

It is clear that investment in infrastructure is sorely needed on the African continent, and development of infrastructure networks in Africa is perceived as both a challenge and an opportunity. However, in stark contrast with previous decades, a significant (and rapidly increasing) amount of capital is being put towards solving Africa’s infrastructure challenges.  For Nile Capital’s team, the opportunity for investing in infrastructure falls into two main segments: physical infrastructure, and digital infrastructure.

On the physical side, access to affordable and effective housing, water and sanitation, energy, and transportation remains a challenge in many parts of Africa. Also, the ability for countries to capitalize on natural resources and manufacturing is hampered by poor infrastructure networks.  However, countries across Africa understand these challenges, and are actively investing in their solutions.  At the same time, companies that are involved in the development and maintenance of these networks stand to benefit from substantial investment in infrastructure.  In fact, McKinsey predicts that between 2008 and 2020, revenue for infrastructure companies in Africa will grow by an annualized 9%, reaching over $200 billion by 2020, from approximately $72 billion.

In addition to physical infrastructure, the development of digital infrastructure networks has and will continue to have a profound impact on the continent.  In fact, in many countries the challenge and prohibitive cost of maintaining a land-line network had for many years made it impossible for Africans to remain connected.  However, the introduction of cellular phone networks has caused a substantial shift in the landscape on the continent.  Whereas at the turn of the century cell phones were still relatively uncommon, market penetration over the past ten years has been profound.  In fact, Africa’s cell phone market has grown by more than 20% annually over the past five years, bringing the total number of subscribers from 283 million only five years ago to above 649 million through the end of 2011.  This number is expected to rise to 735 million by the end of 2012.

A significant opportunity for further penetration in the cellular space does however remain.  While access has continued to improve, 36% of individuals in Africa’s 25 largest markets remain without access to cellular phones.  In addition, 96% of phones are currently pre-paid, and data technology has only just begun to make inroads in the market.  Future developments of better cellular and internet connectivity thus will continue improving access to these technologies, and present remarkable opportunities for investment.

Consumer Growth

Finally, there are also compelling opportunities across Africa for consumer goods companies, especially given limited growth prospects in much of the developed world. The opportunity for investment in consumer growth across Africa is underpinned by two trends: a growing population, and an emerging middle class.

Presently, there are over one billion people living on the continent of Africa.  While it may be true that parts of Africa remain challenged financially, according to the McKinsey Global Institute, Africa as a whole had a combined spending power of $860 billion in 2008. This number, which has been growing robustly for years, is expected to rise to $1.4 trillion by 2020, as population and economic dynamics make it possible for more Africans to increase their consumption of basic and discretionary goods and services.

On a sheer population basis, Africa’s consumption should be expected to grow as the population rises.  According to the World Population Reference Bureau, Africa’s rate of natural increase in population is estimated to be 2.4% - meaning that by mid 2025 there will be an estimated 1.4 billion people living on the continent, and 2.1 billion by mid 2050.  In fact, according to McKinsey, Africa’s workforce will be the largest in the world by 2040 – surpassing even India and China.  Thus, should the level of consumption not change on a per capita basis we should still expect the continent’s spending power to expand as the population grows.

At the same time, not only is Africa’s population rising: so is the size (and spending ability) of its middle class.  For example, McKinsey notes that in 2000 there were approximately 59 million households in Africa with discretionary income. By 2008 that number had jumped to 85 million, and by 2020 it is forecast to rise to 128 million – more than double in merely two decades.  As the number of households with discretionary spending rises, the opportunity for consumer goods companies to sell more and better products rises as well.  At Nile, we understand the opportunity for growth in companies that effectively produce goods that suit African consumers’ needs. We see enormous opportunities in retail, food, housing, cellular phones, and financial firms that are well positioned to access the growing consumer market. We also believe that African companies are often uniquely positioned in the market, as they are able to bring local knowledge and branding power to their business model.

Even more surprising is the opportunity for penetration of new markets. Since the year 2000, McKinsey notes that 316 million new phone subscribers have signed up in Africa. However, they also note that in 2008 only 39% of Africa’s population had access to telecom services, 38% had access to modern retail, and 20% had access to banking (note that these statistics include South Africa, where the numbers are 92%, 68%, and 60% respectively, skewing the average up). It is amazing to think of the potential for growth in companies that are able to fill those gaps.

Going forward, we expect each of these themes to represent an excellent opportunity for investors who are seeking great value and long term growth.  We believe strongly that these three themes are driving Africa’s shifting economic landscape, and will strive to help investors participate in the Continent’s growth.
For more information, including a PDF version of the above, please contact Nile Capital Management at 646-367-2820 or