A five-step African investment strategy during the economic crisis

by MMC
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Lagos, Nigeria

Lagos, Nigeria

By Dr. Harnet Bokrezion

Almost everyone feels 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 ideas on how investors can strategically reduce risk and increase their success in Africa – especially when investing for the first time and during difficult economic times.

Step 1: Choose a low-risk, high-opportunity market and sector

Investing in higher risk markets in Africa, associated with high risk sectors, can be difficult, particularly in times of volatility. Therefore, it is advisable to select the location of your African business model by assessing the risk-opportunity ratio of that market, as well as the sector in which you plan to invest. An objective assessment of several markets and sectors in Africa is crucial, rather than relying on personal data. preferences or perceptions.

Africa offers 54 countries to choose from. The most favorable business environments are often found in low-risk, high-opportunity markets, such as Rwanda, BotswanaAnd Ghana.

Consider Nigeria, AngolaTHE Democratic Republic of Congo (DRC)Or South Sudan. These markets are very intriguing and offer huge opportunities, but the investment risk is also usually significantly higher. Pairing a high-risk market choice with high-risk sectors – such as capital markets, financial services, mining, construction or infrastructure development – ​​or combining them with capital-intensive projects, such as creation of a manufacturing plant, can significantly increase your risk.

Conversely, a less risky country like TanzaniaRwanda, Ivory Coastor Botswana, combined with a lower risk industry, such as agricultureexports, tourism and hospitality (barring another pandemic) or business services can significantly reduce your risk level from the start.

Risk awareness and management should be an integral part of your investment strategy. Investing in an African market with a significantly lower threat of corruption, conflict, currency fluctuations and personal security concerns can reduce your risk. At the same time, focusing on areas of high opportunity in low-risk sectors can greatly improve the potential for success of your investment.

2. Invest in a small local business that already has customers and customers lining up

I remember the story of a pig farmer in Rwanda a few years ago who started his operation on a modest budget. He first purchased a handful of pigs for pork production using savings from his teaching work. Through the prolific breeding of pigs, he was able to significantly increase their numbers. As the national newspaper reports, in about four years it has become Rwanda’s largest pork producer.

Shortly after starting his business, he received an offer from a major hotel in Kigali to supply him with 200 kg of pork per week. The hotel industry presents him with an excellent clientele. However, due to existing commitments and limited capacity, it had to decline this opportunity – it simply could not meet the demand at that time.

This is where the opportunity for the investor lies. The relevance and timing of your investment is essential: invest in simple businesses offering essential products like food (whose production continues even during economic difficulties) and invest at a time when the business urgently needs increase its capacity and production. Your return on investment could materialize quickly because the business already has customers eagerly waiting to place more orders. These are the opportunities to look for when investing in Africa, and they exist across the continent. Remember, product-market relevance and the timing of your investment are crucial to improving your success.

Step 3: Focus on high scalability and premium products

A key success factor in Africa’s emerging markets is “scalability”. Consider how easily the product or service you are investing in can be expanded within the country and potentially across African borders. For example, investing in a company that imports specialized 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 company that provides logistics or technology solutions, manufactures local construction materials, offers business process outsourcing services, or farms fish, presents great scalability both within the country and beyond. beyond borders.

There is another crucial strategy in times of economic crisis: investing in small companies targeting the high-end segment of the market. This includes established businesses, export markets or the upper class of consumers. Why is this important? Inflation and rising prices will likely persist for some time, meaning the products and services your business offers will become more expensive. Catering to lower income brackets with low profit margins can become unsustainable, as these consumers may eventually no longer be able 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 if prices increase.

Step 4: Make sure you’re not just spending hard currency, but earning it too

A common scenario for many business owners in Africa is purchasing and importing ingredients, equipment or other items essential to operations, often paid in US dollars or another hard currency. Then, they sell their products or services in the local market, thereby earning local currency. If the local currency rapidly loses value against the U.S. dollar, the business could begin to struggle. Indeed, it must convert increasingly large amounts of local revenue into US dollars, which becomes increasingly costly and, ultimately, unsustainable. Additionally, if there is a shortage of US dollars in the central bank of a respective African market, access to sufficient dollars for necessary purchases may become difficult, hindering continuity of operations.

Consider the opposite scenario: earning in dollars while spending in local currency. For example, consider a food processing or manufacturing company that exports, or a real estate or hospitality company. These businesses can generate revenue in dollars while their expenses on products, personnel and operations are in local currency.

Step 5: Cultivate ingenuity and great adaptability

A crucial factor that can significantly improve the success of your investment is the level of contribution you can make to the business you are investing in, particularly in terms of ingenuity in market strategy and ability to quickly adapt to changes when necessary.

Many African entrepreneurs and SMEs are looking for investors who offer more than just financial support. In times of global economic difficulty, a resourceful business can remain agile and quickly adapt to emerging challenges. Such a company is invariably more resistant to stress than a company that strictly adheres to a set plan, simply to satisfy the expectations of institutional investors. Therefore, I believe that team dynamics and community spirit within the team and its investors (including you) are crucial for survival.

If you are interested in joining Dr. Harnet and his team of high-profile investment consultants on one of their upcoming business and investment missions to Africa in 2024, register here.

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