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Why Investing in Emerging Markets is a Win for Investors and African Companies

This article was first published on AllAfrica. Read the original post here.

CEO of Development Partners International (DPI) Runa Alam talks about the history of Pan-African private equity, the potential for institutional capital to drive the continent’s development, and the role of the Prosper Africa  initiative in catalyzing two-way trade and investment between the United States and African nations.

From the time she was a teenager, Alam knew she wanted to do work that brings private capital into emerging markets as a means to reduce poverty.”Even in the 1970s, I realized that most capital sits in the private sector, and without that capital coming into countries that need development, they are not going to develop,” she says.

In 2007, Alam founded DPI, a leading Pan-African private equity firm and long-term investor. DPI works closely with the management and entrepreneurs of their portfolio companies to create value and drive impact.

DPI’s hands-on investing strategy is “extremely granular”, according to Alam. “We work with the management teams, CEO, COO, and lots of other people up and down the hierarchy, with a view to achieving high returns and simultaneously high impact.”

Investment firms like DPI that focus on impact investing and environmental, social, and corporate governance (ESG) investing are driving positive social and environmental change across Africa. However, nothing has the potential to impact Africa’s development like increasing the amount of institutional capital, including from pension funds and insurance companies, throughout the continent.

Tell me about your experience working with Pan-African equity funds.

My interest in working in emerging markets started when I was a teenager, so I studied development economics as an undergraduate and went on to business school. Then, for the next 20 years, I had a front row seat watching that huge shift towards private sector development, leading to job creation, betterment of life, and poverty reduction.

In the 1990s, a number of things happened: the Berlin Wall came down, and the Cold War ended; the last of the African countries that were not yet independent became independent; and the all-race elections in South Africa had led to the election of Nelson Mandela.

With all these things coming together, development institutions asked themselves the question, “How do we develop this continent? What’s the bigger vision and the long-term plan?” And they realized that a lot of the GDP in those countries was sitting with governments and government activities.

The development institutions thought, “We need to grow the private sector. We can leverage our money by creating many fund managers, using the private equity model from developed countries, modifying it for Africa, and helping create or grow African companies. If those companies become bigger, then they will have more jobs, and it will lead to development.”

For me, the interesting thing that has happened over the last 20 years is the increased focus on impact and ESG. Twenty years ago, the only talk I heard about impact investing and ESG was in Africa because when the development institutions put up their money with the private equity fund managers, they put impact and ESG requirements in the contracts. So, in Africa, we’ve been doing this work for years, which is something that a lot of investors from developed countries don’t understand. From the beginning, we had to have returns and impact work within ESG frameworks, so over the years we’ve become better and better at it.

Women entrepreneurs at a U.S. State Department event.

How can an increase in allocations from institutional investors change the equity investment landscape in Africa? What impact could such investments have on the people living there?

It is the Holy Grail, full stop. Most money, most capital in the world, lies in the private sector. Most invested money lies in the pension fund systems, the sovereign funds, and endowments, and most of that money is in the U.S.

Accelerating U.S. pension fund money, endowment money, foundation, and family office money into Africa can transform the whole continent. If it is done well, through the right companies, and with responsible fund managers, then this will catalyze the continent.

Africa today is in a place where the basics are there in most of the countries. There is an entrepreneurial mentality. Look at Nigeria, technology companies are doing extremely well there. Throughout Africa, there are ecosystems of startups. There are 23 stock markets. There are business schools across the continent, and the returning diaspora with great educations from top business schools in the world, Wharton, Harvard, and elsewhere. Africa’s got the energy all there as to what the possibilities could be.

In many parts of Africa, there have been several rounds of democratic elections and decent governance. Is there more to go? Absolutely. And that is part of development, but the basics are there now, and if you bring in the money and invest it properly, it will have a huge, huge impact. In Africa, on average, one job supports 20 people. That’s not really true in the U.S. So, sometimes, what we do has an impact on many more people’s lives than it would in the U.S.

Why is co-investment between American and African pension funds a strong investment strategy?

Co-investment amongst American pension funds and African pension funds is an extremely positive thing. What do they gain? The African pension fund can interact with the American CIO and the pension fund staff who have been investing in private equity for decades. It provides a lot of expertise to draw from, a lot of learning. As I always say, the problem with private equity is that it’s private. You can go out and read things, and you can take a course, but the reality is everybody learns through the experience of actually investing. For an African pension fund to have access to pension fund investors who’ve been doing this for decades and have gained expertise in best practices and the risks to look out for, that is invaluable.

On the other hand, as American pension funds go into a new continent, there’s this fear: do we really know who the right managers are? Who the right companies are?

The local pension funds would know that. They would know the right entities to invest with. If something happens and a negative news item appears in the newspapers—the local pension funds would understand whether it is important or not. They can give perspective to the American pension fund manager as to why this is worrying and what to do about it or if this isn’t worrying and it is just something that’s written, but it doesn’t matter. So African pension fund managers can provide the local expertise and American pension fund managers can provide their private equity investment experience.

An example of manufacturing capabilities.

Can investments in Africa have positive impacts on developed countries?

Absolutely. Fund managers who do impact and ESG work must also return competitive internal rates of return. So, a pension fund should not have to choose between its pensioner’s livelihood and doing good things. And I think in Africa because of our history of having to deliver high returns and impact, we fund managers already think that way, and we are all working to deliver that. One of the big benefits of investment is getting a return from Africa.

Investing in Africa can also be a hedge because the macro-cycles in Africa move more along the commodity cycles, rather than how the U.S. is doing. They’re exporting to the U.S, so if that market strains, those economies or countries have problems. In Africa, not so much.

On top of that, Africa, like any other part of the world, is a consumer market. There are people there: a third of Africa is middle-class, and that third is growing, so the consumer market is growing.

Why is it that China is investing so much time and money in Africa? Yes, they are looking at natural resources, but they also see Africa as the future for the products that they manufacture. As Africa grows, its income level grows, and Chinese products will already be there, and they will become household names. People are going to grow up with them, and they’re going to go back to them.

African multinationals and African investors must think the same way. It is a very young population; the average age is 19.5. It is the second fastest growing continent in the world after Asia. There’s a huge future there for African investment of all sorts, whether it’s corporate, institutional, or even American entrepreneurs going there to create businesses in partnership with Africans. It is a continent that cannot be ignored.

How can the U.S. Government encourage private investment, particularly institutional investment, into the continent?

USAID’s work with MiDA Advisors in support of Prosper Africa is invaluable, possibly more than a lot of people realize. I had a conversation just yesterday with one of the biggest non-U.S. global pension funds. Thirty percent of what they’re investing in goes into impact investing. We were discussing how to get other pension funds to invest in Africa, and where we came out is that the very first thing that has to happen is that visual—being there and building an understanding of the local investment landscape. Things that are far away and unknown bring forth a lot of risk adverse reactions and a lot of anxiety, which is normal.

However, how does one take that first step towards knowing something? For investors, that first step is very much that trip to Africa and the meeting up with local pension funds, companies, and fund managers. By funding and leading investor delegations to Africa, USAID and Prosper Africa are helping investors take that step and being able to get on the ground in Africa has changed the view of so many CIOs. Continuing this work and maybe expanding, like to family offices that are small and can’t afford the trip, that is the number one thing they can do.

This interview has been edited for clarity and length.