Year End Position Updates
December 20, 2011
Mozambique Part I
January 4, 2012

Off To Africa….

By the time that you read this, I will be on my way to Africa, a continent of unlimited possibilities. Before I talk about what I see there, I think it’s important to walk through a quick historical overview. I apologize in advance for lumping nearly 50 countries in Sub-Saharan Africa into a few quick paragraphs, but the historical similarities become obvious when you think of the continent in this way.

Europeans discovered Africa in the late 1400s. It was seen as a good staging area for reaching India while doing a bit of pillaging when convenient. With the exception of the slave, gold and ivory trades, Europeans largely left Africa alone for the next few centuries. In the late 1800s, the European powers suddenly became infatuated with the concept of colonies. Over the course of a few decades, Africa was divided up in the smoking rooms of Europe with each power given its allocation of colonies. Unfortunately for Africa, no one bothered to ask anyone there what they thought.

Any middle-school history student can tell you that by drawing artificial lines throughout the continent, the Europeans only served to create endless conflict. Tribes were split apart into rival spheres of influence while centuries-old enemies were commingled into newly created countries. European authority is the only thing that held the whole mess together for the next few decades. Following World War II, the African nations began to demand self-governance and autonomy, which the European powers grudgingly granted and by the early 1970s, the African nations were largely independent.

Suddenly free of the European powers, the newly formed African nations immediately found themselves mired in the cold war. We had our thugs who we propped up, they had theirs. Both sides funded revolutions and counter-revolutions. The tribal animosities suddenly became great tools for both sides to meddle with and reinvigorate a century of latent animosity. Africa became a continent ensnared in assassinations, civil wars, genocides and chaos. With the end of the cold war, the Russians rapidly withdrew from Africa, the US announced ‘mission accomplished’ and withdrew as well. This left a continent full of thugs without their stable sources of funding. Over time, these guys slowly faded away—either removed in coups or having died peacefully. That generation of African leaders is slowly being replaced by a new generation. This generation increasingly has been educated in Europe or the US, has a capitalist leaning. They want to see their countries succeed and this is the opportunity that I also see.

Africa is one of the few places in the world with substantial resources of under-utilized farmland. More importantly, there are huge reserves of all sorts of commodities from gold, to diamonds, to oil and everything in between. Most interestingly, as an investor, you are looking at a continent that is coming from such a low base level that any incremental improvements in standards of living can lead to incalculable gains for investors. If a few of these countries actually get it right, you can make a career out of a few small investments. Just as importantly, because of historical prejudices, most of the investment community has written the continent off—meaning that there aren’t hordes of hedgies bidding up assets and making it difficult to find opportunities. At this point in the narrative, I think it’s best to remember that Sub-Saharan Africa is actually made up of four dozen countries. These are quite unique in their personalities. They will not all be successful investments. The current leadership and the histories of these countries will shape their futures. It is dangerous to lump them all together and this is the reason that I am going to Africa in the first place. I am a big believer in ‘boots on the ground’ research. I intend to visit at least three countries and possibly a few more on the way. I have 20 days allocated to Africa and intend to see as much of it as I can.

A few general rules apply when investing in former colonies. The British, in their munificence left their colonies with roads, rails, bridges and all the infrastructure assets that a country could need. Even more importantly, they left the true gift of civilization, English Common Law as a system of governance. Even decades after the British left, their colonies tend to be peaceful, with functional infrastructure and likely the best investment opportunities.

The French left their sense of cultural self-superiority and really not much else. The lone redeeming factor is that the French left a healthy dose of the French culinary tradition; great food, atrocious service. If you have 4 hours to waste on a meal, these are great colonies for you to visit on holiday. In general, avoid French colonies as investments—especially because the French view of revolutionary Fraternite means that they need to continue meddling.

The Spanish came into their colonies simply to pillage them. After leaving a healthy dose of religion, they pulled out when the easy pickings were taken. This means that the small elite who stayed behind are in charge. Sometimes this is good, sometimes there’s anarchy and frequently there’s a bit of both. These can be good to invest in, but always watch the politics—things can and do change suddenly. Finally, the Portuguese left a mixed bag very similar to the Spanish, but leaning more towards the side of anarchy. However, some countries like Brazil have done just fine.

The former Portuguese colony of Mozambique is first on my list of countries to visit. It’s one of the poorest in Africa, which means that any incremental improvements go a long way towards economic growth. More importantly, there are a number of massive cap-ex projects under way in the coal transport and natural gas liquefaction that can entirely re-make the country’s economy. I need to see this for myself. Then we are off to visit two former British colonies with huge potential. After that? I don’t know. I have room for one more country. I intend to keep my ears open and go where the businessmen in Africa are most excited to be.

In summary, there is a great saying about Africa. “You trade the rule of law for unlimited upside.” That has been the case for decades now. I wrote a similar piece about Africa for my hedge fund investors in the fall of 2007. A few weeks later, some boy soldiers held us up at gunpoint in Ivory Coast. The whole incident threw me off the scent. Since then, Ivory Coast has devolved into anarchy (never underestimate the value of boots on the ground research), but other countries I visited like Ghana have been growing nicely. I was bullish on the country, but getting guns pointed at my face turned me off to the whole continent and sent me off searching for more peaceful places for my money. I’m heading back to Africa to try it again. True fortunes will be made if you can select the right country and the right team of entrepreneurs to back with capital. Many of these countries have nascent stock exchanges that I intend to visit along with a healthy dose of private investment opportunities. Finally, I want to explore real estate. Caveat Emptor, I’m off to Africa!!

Categories: Travels
Positions Mentioned: none

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