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

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