Sub-Saharan Africa is the final frontier for state-owned investors (SOIs), offering potential large rewards – but also significant challenges. For patient investors capable of honing in on good deals, the region offers significant long-term returns that could generate big yields.

Abu Dhabi sovereign wealth fund Mubadala has teamed up with French state investor Bpifrance to back a new African private equity platform, committing EUR350 million (US$414 million) each. They plan to make joint investments in private equity and venture capital funds, investing in high growth startups. The two partners have already forged a close relationship with EUR1 billion committed to private equity investments in technology, healthcare and education. Mubadala also committed around EUR1 billion to Bpifrance’s Lac1 Fund, dedicated to listed French multinationals, in 2020.

Bpifrance already has an established fund of funds program in Africa, known as Averroès, which manages 21 private equity and venture capital funds and over 150 underlying companies in 40 African countries. Its recently launched fourth fund has a target of EUR100 million.

Mubadala Deputy Group CEO Waleed Al Mokarrab Al Muhairi said, “We are excited to extend this partnership into Africa, a market which we believe has significant untapped potential, and to invest alongside them in high-growth companies.”

Sub-Saharan Africa has lacked inward investment from relatively small state-owned investors. Most deals have come from African-owned strategic and savings funds investing in their domestic economies. A recent example is a US$1.4 billion fertilizer plant in Nigeria, spearheaded by the country’s sovereign wealth fund, the Nigeria Sovereign Investment Authority (NSIA), and drawing interest in partnerships from foreign investors; NSIA allocates half its US$3 billion portfolio to national infrastructure.

African SOIs are, however, small. Their combined AUM is barely US$120 billion, of which US$106 billion is held by South African public pension fund PIC. Only four African SWFs have AUM of over US$1 billion: Angola’s FSDEA (US$4.6 billion), Botswana’s Pula Fund (US$4.2 billion), Nigeria’s NSIA (US$1.8 billion) and Gabon’s FGIS (US$1.0 billion). They are minnows in the SWF universe.

Nevertheless, there has been growing interest in the continent from foreign SOIs, particularly in infrastructure and natural resources. Middle Eastern funds have led the way. Yet, they have faced major challenges. Tanzania’s Bagamoyo port development project, backed by the Oman Investment Authority (OIA) and Chinese investors, has struggled to get going amid disputes with the Tanzania Ports Authority over what it sees as commercially unviable terms. The new administration under President Samia Suluhu Hassan is willing to proceed with the project if a deal is reached.

With a penchant for natural resources, OIA has invested heavily in Kenmare Resources, the Ireland-based global producers of titanium minerals and zircon which operates the Moma Titanium Minerals Mine in Mozambique. The Omani investor has also taken a significant minority stake in Australia-based potash miner Kore Potash (formerly Elemental Minerals), which operates the Kola Sylvinite Project in the Republic of Congo.

Telecommunications are also an attraction to SOIs seeking to gain exposure to a high growth market. Singapore’s Temasek and the Qatar Investment Authority (QIA) have taken stakes in Airtel Africa, which initially struggled to gain purchase in the continents mobile networks but has secured 94 million customers, making it the fourth operator on the continent behind the trio MTN, Vodafone and Orange.

QIA has also acquired a majority stake in Bugesera Airport in Rwanda’s capital Kigali and a 49% stake in RwandAir, hoping to gain exposure to one of Africa’s highest growth economies, benefitting from political stability and open market. Earlier this year, the Qatari investor forged a joint venture with  Italian utility Enel - Enel Green Power - to finance, build and operate renewable energy projects in Sub-Saharan Africa. The deal gave QIA a 50% stake in projects in operation and under construction in South Africa and Zambia, amounting to around 800MW of capacity.

While deals in the continent are still relatively few and far between, the continent could yet see a leap forward in SOI capital, which benefits from being highly patient – as Temasek and QIA have shown in standing by Airtel Africa, despite initially thin margins and high debts.

Aside from the kind of political and regulatory challenges faced by OIA in Tanzania, investors also face the challenge of small consumer markets, lower urbanization, lack of industrialization, poor financial inclusion, and volatile exchange rates. These challenges also offer opportunities for state-owned investors keen to use their capital to solve problems and generate growth. For those willing to take on risk for multi-decade returns, investing early in a continent that is yet to demonstrate its full potential and in many cases is starting from a low base is still a tempting prospect.

Photo by Artem Beliaikin from Pexels