Private equity and economic development in Africa

Last night I had a chance to join a round table discussion hosted by the Harvard Private Equity club on "Private Equity and Economic Development", featuring Roberto Mizrahi of the South North Development Institute (http://www.southnorth.org/). Though I was the only person there without a finance background, I was early to the event and had a chance to speak with Roberto in person about his work. As with others of similar stature in the world of investing for development, I found him to be a fountain of wisdom while maintaining a warm, inviting, and down-to-earth demeanor. And with a unique sense of humor; upon finding out about my experience in microfinance he made it a point, during the group discussion, to point at me every time he mentioned micro-credit. The discussion focused on Africa and Latin America as that was the focus of his work; here are some of my recollections on private equity, investing, and development.

1. Africa is going through an economic growth phase (GDP growth in 2006: 5.7%, 2007: 6.1%, expected 2008: 6.8%), primarily driven by the booming oil and commodities markets. It was pointed out that countries such as Nigeria and Kenya have active stock exchanges and have seen strong IPOs in recent history. Financial access to individuals has also been increasing.

2. Emerging markets private equity is a local game. One of the first points made by Roberto in the discussion was the importance of local talent in investing. True, there will always be a crucial role for US-based investors in developing countries because of the need for foreign capital, but local partnerships are necessary to build relationships, navigate the regulatory framework, and bridge cultural gaps.

3. Africa is not a country, it's 53 countries. And not only are there 53 countries, but these countries differ vastly in level of economic development, opportunities for local investment, and regulatory framework. Egypt and South Africa, for example, have more developed capital markets and some oil exporting countries are attracting significant investment, while in some parts of Sub-Saharan Africa, raising debt is still expensive and medium to large sized investment opportunities are few and far between. Hence, investors should look regionally for opportunities.

4. Private equity as a tool for development. PE itself won't solve the world's problems, especially in large parts of Africa where many key issues related to disease, AIDS, malnutrition, and poverty have yet to see market-based solutions. To this Roberto described PE as a vehicle for wealth generation, and that wealth allowing for the creation of foundations which can better address these fundamental development issues. In Africa PE can also be a direct tool towards development, with oil and gas, mining, infrastructure, and telecommunications being the most lucrative. And the poorest countries? Well, there may be a trickle down or halo effect, but that's more up to governments than the PE firms.

5. Innovation is still the key to double-bottom line investing. I've been saying it for years (ok, so I started saying it after I heard CK Prahalad say it...), but Roberto said it again. Standard business models for delivery of products and capital cannot be replicated in emerging economies. Instead, traditional models have to be redefined in order to be effective while profitable. He gave a great example in microfinance (while pointing at me); it isn't profitable to replicate the consumer bank loan model in a low-margin high-volume system (because of high unit cost). However, if one is able to create a system to approve a hundred loans in aggregate, it might be profitable.