Sub-Saharan Africa was once seen by U.S. investors as a pure commodity play—or as a part of the world to avoid entirely. No more. Smart money is increasingly finding its way into Africa, and it's getting big returns on (relatively) small investments.
David Rubenstein, co-founder of $180 billion Carlyle Group, was pushing Africa this month as the next big thing when another private equity titan, TPG Capital's David Bonderman, jumped in.
"It's one thing if you've got a few dollars to invest, it is very nice," Bonderman said at the DealBook conference in New York on Nov. 12. "But if you are running a Carlyle and you are trying to invest $500 million a crack, it is not so easy in a place like southern Africa."
Bonderman, who co-founded $55.7 billion TPG, hit on an obvious but important point: Investors increasingly hungry to put money to work in Africa will find few deals that rival growth plays and buyouts in developed markets, which can easily exceed $1 billion.
They can, however, put those "few dollars" to good use.
Big profits from small deals are no secret to Africa-focused private equity firms already well-established in the region. They usually invest $100 million or less—often less than $10 million—into companies that range from cellphones to yogurt to banking. About 52 percent of African private equity investments this year were less than $10 million, and 76 percent were less than $50 million, according to data from the African Private Equity & Venture Capital Association (AVCA).
But smaller investments can mean big profits. Investments on the continent produced annualized returns of 11.2 percent for the 10-year period ending Sept. 30, 2012, according to a study by AVCA and Cambridge Associates. That return was better than U.S. venture capital investments and roughly in line with emerging markets private equity and venture capital indexes over the same period.
To be sure, investing in Africa is no slam dunk. Whole swaths of the continent are ravaged by civil unrest or outright warfare, and Africa is broadly afflicted by political corruption, weak infrastructure and unreliable court systems.