Africa’s Chance

To be sure, investing in Africa is not for the faint of heart. There are still enormous political risks, which range from military coups and nationalization to civil wars and ethnic and religious insurgencies that afflict several major economies and commodity producers. Graft and corruption are rampant. But it is an enormous continent and reality is different in every country, with many adopting pro-business and pro-growth policies. Scharar points, in particular, to the southern and eastern parts of the continent, to the former British colonies of Tanzania, Uganda and Kenya, where there have been considerable positive changes.

As a matter of general principle, he sees Francophone countries as lagging behind in opening up their economies and in getting away from the state-dominated model. "Their trade is still primarily oriented toward France, and the economy is dominated by the government," he notes. Also, commodity producers, while they tend to earn more hard currency, also tend to be more troubled and corrupt, with little of the money settling in the home economy. Nigeria, which is a major oil producer and financial powerhouse in Africa, is also the prime example of these woes. Its various military and civilian rulers have stolen upward of $400 billion, which has been taken out of the country to secret bank accounts abroad.

In this respect, China's involvement has not necessarily been positive. Chinese companies are not interested in promoting openness, free competition or democracy. They often find it easier to make backroom deals with corrupt strongmen than sign transparent contracts. Their aid and investment tend to come with strings attached, such as 50-year contracts for commodities and raw materials.

Moreover, Scharar claims that many of the development projects the Chinese undertake in the region are not foreign aid but a payment in kind for commodities they buy. They tend to benefit more the Chinese companies that do the work than the recipients of the largesse. Not surprisingly, a backlash is brewing across the continent against the Chinese presence, which many Africans see as a new form of colonialism. A likely reduction of China's involvement, now that China's own economy is starting to sputter, may in the long run prove healthy for Africa.

Middle Class Emerges

The real story in Africa, then, is not commodities. It's something else—namely, the emergence of the middle class and the rise of the consumer economy. According to figures cited by The Atlantic, the middle class in sub-Saharan Africa is already larger than in India, which is regarded as a success story of the past decade. The African Development Bank projects that over the next decade and a half the continent's consumption spending will triple and surpass $2 trillion. 

Scharar's Africa Fund is focused on the companies that provide consumer infrastructure serving this rising middle class. The fund invests in retail companies, banks with extensive regional retail networks, insurance companies, hotels, railways, etc. It is not alone, as various international companies are also discovering Africa. Walmart, the world's biggest retailer, earlier this year completed a $2.4 billion deal for Massmart, a large South African retail chain.

African consumers are severely underserved. From an investor's point of view, that is a positive, since even a small improvement brings substantial results. Scharar, who is also involved in direct investment in African countries, brought a South African supermarket chain into a shopping mall it owns in Malawi, one of the countries he is especially bullish about. It was an instant success and, moreover, the presence of a quality store prompted other local retailers to start carrying better quality products and fresh produce.

One aspect of the Chinese involvement that Scharar likes is the number of small Chinese-owned stores and other businesses which have sprung up in many African countries. There are now communities of Chinese entrepreneurs established in major cities in the sub-Saharan region. At the same time, there is also a vast number of African trading companies buying Chinese goods for distribution across the continent. This commercial activity is laying the foundation of a retail infrastructure that larger retailers can take advantage of in coming years. However, rather than "opening up" Africa, Chinese traders and manufacturers are doing very much what the Africa Fund does: betting on the imminent emergence of the African middle-class consumer.