by Marc Gunther
February 18 2008: 9:39 AM EST
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Investment in Africa starts to pay off

Widespread perceptions of corruption and violence do not deter some Western firms from putting money into African nations - often with impressive results.

By Marc Gunther, senior writer

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(Fortune) -- Read the news about civil war in Kenya, unrest in Chad, or genocide in Darfur, and you could conclude that Africa is no place to invest money.

But behind the headlines lies business opportunity. Africa's economy is growing at 5 to 6% a year. Inflation is down. Prices are rising for commodities like oil, copper and gold.

Like all emerging markets, Africa is a risky place to invest but "the perceived risk is greater than the actual risk," says Tom Gibian, the chief executive of Emerging Capital Partners (ECP), a private equity firm based in Washington, D.C., that focuses on Africa.

The firm has invested more than $1.2 billion in several Africa funds since 1999. It has invested in 48 companies, exited from 18, recouped more than $600 million and posted an average return of three times its initial investment. "The financial performance has been terrific," Gibian says.

Among the big winners:

--CelTel, a mobile phone company with customers in 13 countries including Kenya and Uganda, as well as such very poor countries as Niger and Chad. ECP bought $50 million of stock beginning in 2000, and received about $215 million when CelTel was sold to a Kuwaiti firm five years later.

--Ecobank, a regional banking group based in Togo. ECP acquired about $12 million of stock beginning in 1999, took a seat on the bank's board, and sold for about $36 million in 2006.

--Societe International de Plantations D'Heveas, a rubber exporter with operations in Ghana and the Ivory Coast that subsequently acquired a Michelin plantation in Nigeria. ECP invested $14.8 million in stock and convertible notes in 2005, and sold for $48.1 million in 2007.

They've had losers, too, of course. A voice-over-Internet phone venture failed, as did a South African over-the-air television network.

Broadly, though, African companies have been aided by increasing efforts by government leaders to promote capital markets, private investment and trade. "The real news in Africa," Gibian says, "is that over the last five years, virtually every country, their presidents, and even the leaders of the opposition parties, have gotten on the same page regarding the primacy of the private sector, the need to deregulate, and the importance of attracting foreign investment. Centralized planning, state control of assets and socialistic rhetoric, for the most part, are dead. Market forces have won."

That's probably an overstatement. Africa's "overall level of economic freedom is weaker than any other region's," according to the Heritage Foundation's 2008 Index of Economic Freedom, which says the region "performs especially poorly in terms of property rights, freedom from corruption and business freedom."

But most experts believe that the business climate is improving. To spread its risks, ECP invests in about 30 countries and various economic sectors. It has more money invested in Nigeria, Africa's most populous country, than any other. Telecom is the funds' biggest sector, accounting for about 30% of its portfolio. The firm has also invested in banks, mining companies, ports and airlines.

Some of its deals could have a big impact if they play out as planned. Two years ago, ECP invested $35 million in Nortore Chemicals, which is rebuilding an abandoned fertilizer plant in the Niger Delta that will use Nigeria's abundant natural gas to make nitrogen fertilizer. If all goes well, after production begins this spring, the plant will make fertilizer for about $100 a ton, a bargain price in Africa that will benefit local farmers. But the previous plant was shuttered because of corruption and neglect, so there are no guarantees.

ECP has 17 of 27 investment professionals based in five offices across Africa. Many are Africans. "You don't pay a visit and then spend $80 million," Gibian says.

Gibian and his chief operating officer, Hurley Doddy, are experienced global investors. Gibian, 54, spent 12 years at Salomon Brothers and Goldman Sachs Asia before joining Emerging Markets Partnerships, an investment firm which created ECP, in 1995. Doddy, 44, worked for Sumitomo Finance and Salomon Brothers in London, Tokyo and Sao Paulo.

They say they can get advantageous terms in their deals because African firms are hungry for capital. "The supply-demand equation for funding is tilted towards the supplier," Gibian says. "If you're a businessman in Kenya and you need $25 or 30 million in equity, there aren't a lot of places to go."

That could change as other investors move in. At the end of a five-day visit to Africa last November, U.S. Treasury Secretary Hank Paulson said that the U.S.'s Overseas Private Investment Corp. would provide up to $250 million in seed money to start three new Africa investment funds. Doddy says that's fine: "We're building a track record that is helping to show that Africa's a good place to invest. We want more people to ask: How can we get in on this game?"  To top of page

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