The BIG Opportunity
Nine of the twenty fastest growing countries are in Africa. But, only 0.5% of private equity and venture capital funding goes there. Why? Well, it has to do with risk. For one, the perceived risk is much higher than the actual risk, which has prevented more capital from flowing there, and secondly, our risk tolerances are often too low. We'll dive into this more below and also look at what some might call "The opportunity of a lifetime."
Perceived Risk vs Actual Risk
Let's go back to March of 2023, I was trading regional banks when Silicon Valley Bank went under. Mass hysteria broke out in the market and people got scared that there was a systemic issue in the banking sector. Charles Schwab's stock, sold off more than 40%, even though it was one of the highest rated banks in the country, because the perceived risk was so high. But those that had a fundamental knowledge of the strength of the company made ridiculous returns. Why? Because they knew the actual risk was much lower than they perceived risk, and they bought the stock. They took advantage of the dislocation between the perceived risk and actual risk. Lesson #1 of investing - dislocations between perceived and actual risk are the eye of opportunity.
This was the first thing I learned after touching down in Africa. The actual risk was much lower than the risk I perceived. We've done a disservice to ourselves and the people across Africa by lumping every country into one category. Africa is a continent of 54 countries, some of which are very challenging, others of which are rich with opportunities. But because investors have lumped them together in our heads, the countries with lots of potential have valuations similar to those that are war-torn. As an investor, this is a perfect dislocation to capitalize on.
Low Risk Tolerances
Managing risk is important, that was my job for several years. But managing risk is different than not taking risk. Everyone has a different risk tolerance, but as Christians, we need to be very intentional and thoughtful about how we define risk. We are commanded by God to take care of our family, so be conservative with the money you need to do that. However, there is a portion of most people's assets that they can afford a higher risk tolerance, especially when it comes to advancing God's mission. And more than the risk of losing an investment, the greatest risk that we as Christians face, is standing before God and him saying, "You knew I cared about these people and you had the ability to help them, yet you didn't because you were scared of the possibility of losing money… money that you can't take with you when you die." I don't know if that will happen when we die, but the principle remains - we are stewards of his resources and we need to use them thoughtfully and strategically for what matters to him. And I think one of the things that matters to him is empowering the poor to be all that they were created to be and reducing horrible atrocities like human trafficking when our investments lead to economic opportunities where people don’t feel the need to sell themselves or their children to provide for their family.
The Opportunity
As mentioned before, when you decided to take risk that the market is mispricing, you position yourself to do very well. 9 of the 20 fastest growing countries are in Africa, yet those nine countries have valuations that are priced more like their peers that don't have the same growth prospects. The emphasis on education in these countries over the last several decades has created a generation of brilliant, innovative, entrepreneurial people ready to change the trajectory of their countries. They understand the problems facing their countries, they have strategies to solve the problems, they're bootstrapping companies with the resources available to them, but with proper partnership and investment, they can help create the world their parents could barely dream of.
The complexity of investing in Africa and lifting nations out of poverty is real, there are lots of things that can go right and wrong. But our job is to ask God how he would use us to solve these problems with the intellect and capital he has provided to us. Christians have never been better positioned to solve the greatest problems in the world and it's time that we assemble a championship winning team and start solving the world's greatest problems.
Thanks for taking the time to read "African Market Insights." As we spend the year traveling the continent to understand what the opportunity set really is, we invite you to subscribe and join the journey, but also to reach out if you have questions. We are investment professionals with a passion for loving people and impacting their lives and would love to get to know you!