Entrepreneurship Zone: 28 November 2023 :: A five-step Africa investment strategy during economic crisis

Tue Nov 28 09:46:09 CAT 2023

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Entrepreneurship Zone: 28 November  2023 :: A five-step Africa investment strategy during economic crisis

Pretty much everyone is feeling the heat. Most of us are aware that we have entered unprecedented economic times, both globally and in Africa. In this article, I want to highlight five simple but rarely discussed insights into how investors can strategically cut down risk and increase their success in Africa – especially when investing for the first time and during challenging economic times.

Step 1: Choose a lower risk/high opportunity market and industry

Investing in higher risk markets in Africa, coupled with high risk industries, can be challenging, particularly during volatile times. Therefore, it’s advisable to select your African business model’s location by assessing the risk-opportunity ratio of that market, as well as the industry you plan to invest in. Objective assessment of multiple markets and industries in Africa is crucial, rather than relying on personal preferences or perceptions.

Africa offers 54 countries to choose from. The most favourable business environments are often found in low risk/high opportunity markets, such as Rwanda, Botswana, and Ghana.

Consider Nigeria, Angola, the Democratic Republic of the Congo (DRC), or South Sudan. These markets are highly intriguing with enormous opportunities, but the investment risk is generally significantly higher as well. Pairing a high-risk market choice with high-risk industries – like capital markets, financial services, mining, construction, or infrastructure development – or combining them with capital intensive projects, like setting up a manufacturing plant, can greatly increase your risk.

Conversely, a less risky country such as Tanzania, Rwanda, Côte d’Ivoire, or Botswana, combined with a lower risk industry, like agriculture, exports, tourism and hospitality (barring another pandemic), or business services, can significantly reduce your risk level from the outset.

Risk awareness and management should be integral to your investment strategy. Investing in an African market with a considerably lower threat of corruption, conflict, currency fluctuations, and personal security issues can reduce your risk. Simultaneously, focusing on high-opportunity areas in lower-risk industries can greatly enhance the success potential of your investment.

2. Invest into a small local company that has clients and customers already queuing

I recall a story from a few years back about a pig farmer in Rwanda who started his operation on a modest budget. He initially purchased a handful of pigs for pork production using savings from his teaching job. Due to pigs’ prolific breeding, he was able to expand their numbers significantly. As reported by the national newspaper, within about four years, he became Rwanda’s largest pork producer.

Soon after starting his venture, he received an offer from a major hotel in Kigali to supply 200kg of pork weekly. The hotel industry presented an excellent client base for him. However, due to existing commitments and limited capacity, he had to decline this opportunity – he simply couldn’t meet the demand at that time.

This is where an investor’s opportunity lies. The relevance and timing of your investment are critical: Invest in straightforward businesses with essential products like food (whose production continues even during economic hardship), and invest at a moment when the business urgently needs to boost its capacity and production. Your investment return could materialise quickly, as the business already has clients eagerly waiting to place more orders. These are the opportunities to look for when investing in Africa, and they exist across the continent. Remember, the product’s relevance to the marketplace and the timing of your investment are crucial to enhancing your success.

Step 3: Focus on high scalability and high-end products

A key success factor in Africa’s emerging markets is ‘scalability’. Consider how easily the product or service you’re investing in can be expanded within the country and potentially across African borders. For instance, investing in a company that imports specialist medical equipment offers limited scalability, as only a few private hospitals in a given market can afford such equipment, quickly reaching a sales ceiling. In contrast, investing in a business that provides logistics or tech solutions, manufactures local building materials, offers business process outsourcing services, or farms fish, presents vast scalability both within the country and across borders.

There’s another crucial strategy during economic crises: invest in small companies targeting the higher end of the market. This includes well-established businesses, export markets, or the upper consumer class. Why is this important? Inflation and rising prices are likely to persist for some time, meaning the products and services your business offers will become more expensive. Catering to lower-income brackets with thin profit margins can become unsustainable, as these consumers may eventually be unable to afford your products. Therefore, when investing in Africa for the first time and during economic crises, focus on products and services that will maintain demand even with price increases.

Step 4: Make sure you do not just spend hard currency, but you also earn it

A common scenario unfolding for many business owners in Africa involves purchasing and importing ingredients, equipment, or other items essential for operations, often paid for in US dollars or another hard currency. Then, they sell their products or services in the local market, earning local currency. If the local currency rapidly loses value against the US dollar, the business may start to struggle. This is because it needs to convert increasingly larger amounts of local income into US dollars, which becomes progressively more expensive and eventually unsustainable. Moreover, if there’s a shortage of US dollar availability in the central bank of a respective African market, access to sufficient dollars for necessary purchases may become challenging, hindering continuous operations.

Consider the reverse scenario: earning in dollars while spending in local currency. For instance, take a food processing or manufacturing company that exports, or a real estate or hotel business. These companies can generate revenue in dollars while their expenses for products, staff, and operations are in local currency.

Step 5: Cultivate resourcefulness and high adaptability

A crucial factor that can significantly enhance the success of your investment is the level of contribution you can make to the company you’re investing in, especially in terms of resourcefulness in market strategy and the ability to rapidly adapt to changes when necessary.

Many African entrepreneurs and SMEs seek investors who offer more than just financial support. In times of global economic hardship, a resourceful company can remain agile and swiftly adapt to emerging challenges. Such a company is invariably more resilient to stress compared to one that rigidly adheres to a set plan, merely to satisfy institutional investor expectations. Therefore, I believe the team dynamic and the community spirit among the team and its investors (including you) are crucial for survival.

Lagos, Nigeria

By Dr Harnet Bokrezion

Howwemadeitinafrica

Invest Wisely!

Bulls n Bears 

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DISCLAIMER: This report has been prepared by Bulls ‘n Bears, a division of Faith Capital (Pvt) Ltd for general information purposes only and does not constitute an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The information contained in this report has been compiled from sources believed to be reliable, but no representation or warranty is made or guarantee given as to its accuracy or completeness. All opinions expressed and recommendations made are subject to change without notice. Securities or financial instruments mentioned herein may not be suitable for all investors. Securities of emerging and mid-size growth companies typically involve a higher degree of risk and more volatility than the securities of more established companies. Neither Faith Capital nor any other member of Bulls ‘n Bears nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Recipients of this report shall be solely responsible for making their own independent investigation into the business, financial condition and future prospects of any companies referred to in this report. Other  Indices quoted herein are for guideline purposes only and sourced from third parties.

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