Can Greed Save Africa?

Fearless investing is succeeding where aid often hasn't

by Roben Farzad

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It isn't easy for Masoud Alikhani to check on his investment. The Iranian-born Briton owns a facility in Mozambique that turns jatropha, a hardy, drought-resistant plant, into biodiesel. An October visit starts with an 11-hour flight from London, his home base, to Johannesburg. From there he jumps into a four-seat Piper Seneca II for a wobbly three-hour flight to Maputo, Mozambique's capital, during which one of the passengers, this writer, gets violently ill. On landing at Maputo's airport, where soldiers stand guard on the roof, Alikhani spends an hour wading through the bureaucratic muck of visa clearance and immunization checks. Then it's back on the plane for a 90-minute flight along the Indian Ocean coast to the province of Inhambane. At the 7-Eleven-size airport there, Alikhani is met by his brother and business partner, Said, for a 90-minute drive past wayward livestock and random brush fires to the village of Inhassune. At the end of a long dirt road, on a vast tract of reclaimed scrubland, sits the Alikhanis' massive biofuel complex. They try to visit every two months.

The brothers are among a growing cadre of intrepid investors looking for treasure in the 30-plus sub-Saharan African nations stretching from Mauritania and Somalia in the north to the continent's southern tip. There's no blueprint for this kind of investing: The best opportunities must be dreamed up and then created from scratch. The Alikhanis saw upside in a fallow cotton plantation. In Nigeria, U.S.-based private equity firm Emerging Capital Partners last year helped acquire an abandoned factory in hopes of supplying the continent with desperately needed fertilizer. South Africa-based microlender Blue Financial Services, energized by an investment from Wall Street last year, now has 171 branches in nine countries, with offices opening soon in Rwanda, Cameroon, Swaziland, and elsewhere. All told, at least $2.6 billion in private equity deals have been struck this year in the region (excluding more-developed South Africa), nearly seven times the 2005 figure.

This is the investing world's final frontier, so undeveloped and impoverished that it makes other extreme emerging markets like Colombia and Vietnam seem like marvels of modernity. Airports open and close arbitrarily. Roads are often unpaved and clogged. Gasoline and diesel are scarce, and rolling blackouts common. The medical precautions are even more forbidding: Traveling to mosquito-infested interiors requires a round of injections and weeks of antimalarial pills that often induce hallucinations.

In many ways, Africa's economic situation seems hopeless. While $625 billion in foreign aid has poured in since 1960, there has been no rise in the region's per capita gross domestic product, notes William R. Easterly, economics professor at New York University. What's more, from 1976 to 2000, Africa's share of global trade dropped to 1%, from an already negligible 3%. The U.N.'s scale of human development, which considers health, education, and economic well-being, ranks 34 African nations among the world's 40 lowest. Thus far, foreign aid hasn't made a dent.

Greed, however, might. Thanks to the global commodities boom of the past few years, sub-Saharan Africa's economies, after decades of stagnation, are expanding by an average of 6% annually—twice the U.S. pace. And like bees to honey, investors are swarming into the region in search of the enormous returns that ultra-early-stage investments can bring. Blue Financial, for example, has already netted its early private equity backers a ninefold gain thanks to the 385% rise in its stock since its October, 2006, initial public offering in Johannesburg. Emerging Capital Partners has bought all or part of 42 African companies this decade and cashed out of 18, with gains on their investments averaging 300%. "The money we can make is matchless," says Emerging Capital Partners CEO Thomas R. Gibian, a former Goldman Sachs (GS) banker.

The region's public stock markets are attracting foreign investors, too.