FDI in Africa has "exploded", says Silk Invest

FDI in Africa has "exploded", says Silk Invest

UK-based investment firm Silk Invest announced last week that it is establishing an EUR100m (US$136m) fund to invest in Africa's food industry. In this month's just the answer, chief executive Zin Bekkali spoke to Katy Humphries about the vast potential Silk Invest sees on the continent.

just-food: Silk Invest is an equity fund focusing solely on the emerging markets of Africa, the Middle East and Asia. Can you talk about the growth potential of these markets?

Zin Bekkali: There is a massive change taking place in the world economy. If you take the human history of civilisation, you will see that most of that time the economy was where the people were. And we think that is going to happen again. You see most of the world population in Africa, Asia and the Middle East, where there is a rapidly expanding middle class. You have strong growth factors that are undeniable. What you have there is real natural growth – the kind of growth we can understand and believe in – and growth which is not leveraged at all.

j-f: What attracted Silk Invest to the African food sector?

Bekkali: Food comes first. It comes before telecoms. It comes before banking. Our focus is really what comes after the farm. There is a lot of money and investment going into agriculture already but what we find interesting is that there aren't many people from the investment management world who are focusing on whatever comes next in the food chain. There is a significant opportunity [for investment firms] because the SME space is a little bit strapped for cash. These local players need to invest and grow – they have plans but they need capital.

j-f: When you invest in a company, would you expect to also have some managerial input?

Bekkali: We have a lot of insight into the food business. As a shareholder for these companies we can provide them with the capital they need to grow but we can also really add a lot of value because of our team. For example, I would like to point out Alexandre Cantacuzène [investment committee director], who is a very interesting profile for us to have because he managed Nestle's business for over 40 years in Africa and the Middle East. He really knows the challenges there.

j-f: Which sectors within the African food industry are you targeting? Are you focused on domestic consumption or export?

Bekkali: For us, the food chain is essentially processing, distribution and retailing. Those are the broad categories. Our focus is that whole value chain: whatever comes out of the farm and goes to the table. The focus is definitely on domestic consumption and also on helping these companies to do more business regionally. That is another thing that we hope to help solve: a lot of the food production is going abroad to the first world.

j-f: How important is branding to a developing African food business?

Bekkali: Brand is crucial. The discipline of branding is very important. There are concepts of branding going on, but that is also where there is a lot of work to be done. If you sell water, you need to make sure that people recognise the brand of that water – that they know it is clean water and something that they should buy.

j-f: What sort of competitive environment do you see on the African continent? Are there a lot of multinational corporations with a strong presence? Have significant local players emerged with their own strong regional and local brands?

Bekkali: A lot of the major food groups from the developed world have taken stakes in local businesses as they try to get into these market. They realise that they have to do it in the local format because you need the pricing power. The pricing power is a very local attribute because the production costs are low, so you really have to set it up locally. But then you have a lot of local interests in fresh processing and meat processing. That still is a local business given that the logistics and the transport are not yet up to standards. Automatically, despite the fact that the infrastructure for transport is not always in place, a local player might have a market that is quite sizeable.

j-f: Alongside infrastructure, are there any other difficulties or risks associated with investing in African markets that are specific to the region?

Bekkali: Risk is a global thing, you can't really regionalise it. I sometimes see trucks stopped at the border because there is a strike somewhere in France – that can disrupt logistical chains as much as a problem in the infrastructure in Africa. Risk takes many shapes and forms and we should never forget that we live in a world where we have earthquakes and natural disasters. Those are risks that are typically not even contemplated.

j-f: But perhaps there are certain regions of the world that are more at risk to certain problems? For example, last year Nestle had some difficulties in its relations with the Zimbabwean government. Is political instability something you guard against?

Bekkali: Political risk I think again is a global thing. You can have protectionism in developed markets, you can have property right issues in developed markets. People tend to assign political risk to Africa but they forget about the fact that in Russia or China you might have your assets seized by the government. There was a European country who not-too-recently sold a bank with shareholders to another bank in a neighbouring country without shareholder permission. This was the heart of Europe. This was Belgium.

If you think about Asia, you don't immediately think of Afghanistan or Myanmar – you think of China, Thailand, Korea. I think Somalia and Chad are as rare to Africa as is Afganistan and Myanmar are to Asia. There are 53 countries – there are a few countries where you obviously will not be comfortable. For example, we wouldn't do things in Sudan or Chad.

j-f: Which markets are you targeting for investment?

Bekkali: We are initially targeting the markets where we have a local presence – Morocco, Egypt, Ghana, Nigeria and Ethiopia. What all these markets – except for maybe Ghana – have in common is that they have very large populations and hence the demographic driver that we so strongly believe in is present.

j-f: With all the potential offered by Africa, why does it receive so much less attention than other emerging markets, such as the BRIC markets?

It has a lot to do with perception. If you were aware in the 1980s I think we have all been conditioned very much by things like Live Aid.

It makes absolute sense that Brazil, China, India and Russia where the first ones to become a part of the investor's portfolio. China and India are pretty obvious because of their humongous sizes of population – it really does not take much thought to see why they are in that group – while Brazil and Russia produce a large amount of commodities. These markets were therefore included in investment indexes earlier, making them part of the universe that investors would look at.

The dynamics between the BRIC markets and Africa are very similar, but the markets we are looking at are at a lower state of development and therefore there is more upside. The fact that the BRICs have done so well recently is great news because it is testimony to the fact that investors understand the dynamics of the world has changed.

j-f: Do you expect to see a significant increase in investment flowing into Africa in the near term?

Bekkali: Yes, and we are already seeing it in fact. We are seeing a very strong increase. Foreign direct investment in Africa has exploded over the last five to ten years. A lot of this investment takes some time materialise, but the effects are very positive on the African economy, which in turn lures more international investment.