“C’est surtout un problème de fonds propres,” (“it’s mainly an equity financing problem”) says a mid-career Malian credit officer to a disappointed entrepreneur as he throws the latest loan application into a growing pile at the far right of his desk. There is nothing unusual about this scene. Banks in Mali abound with devoted credit officers and entrepreneurs sharing their mutual frustration with the absence of in-country equity investors to back investment opportunities.
This story is more frequent in Francophone Africa than elsewhere on the continent: Frontier market investors active in Africa have historically focused on the larger English-speaking and commodity-rich countries of the continent. This narrow focus has meant that they are missing opportunities in other regions—especially Francophone West Africa (FWA). Historically, the turf of a few specialized players with a social impact mandate, FWA has a number of attributes that make it a particularly attractive destination for private equity investors on the continent.
A euro-pegged, shared currency
First of all, FWA’s CFA franc, the euro-pegged currency that the West African Economic and Monetary Union’s (WAEMU) eight member countries share, provides relative currency stability. Investors find this stability particularly appealing after two years of currency corrections for portfolios exposed to the commodity-driven economies of Nigeria, South Africa, and Zambia. Moreover, the shared currency creates opportunities for investments to scale more easily beyond national borders.
Relatively less competition despite growing interest
In addition to this “currency comfort” argument, FWA’s underpenetration by private equity and thus lower level of competition for deals allows for more attractive entry valuations than East Africa.
By any measure, commercial private equity investments have significant room to grow in FWA, considering current levels of capital deployment in comparable markets. Based on research by the African Private Equity & Venture Capital Association (AVCA), there were 167 private equity transactions in East Africa between 2010 and the first half of 2016 for total transaction volume of $1.4 billion. Over the same period in FWA, the number of transactions was roughly a third of that (55) for a total deal volume of around $480 million (35 percent of East Africa’s transaction value). The transactions in FWA were also narrow in geography: Côte d’Ivoire alone represented more than a third of the region’s total number of transactions through 20 deals.
In addition to receiving more investment than WAEMU, East Africa also receives a far larger share of its investment under the form of equity than WAEMU countries do (30 percent compared to 12 percent for WAEMU countries), based on research by the U.K.’s Department for International Development’s Impact Program. This situation highlights the current equity financing supply gap in FWA and the opportunity for firms that can help to meet it.
A reemerged economic hub that is catalyzing the region
Moreover, after experiencing two civil wars over the past 15 years, Côte d’Ivoire is back. FWA’s historical economic and financial powerhouse has returned to political stability and is experiencing dynamic economic growth fueled by foreign investment and transformative investments in transportation and power infrastructure. The country’s 2016 GDP growth forecasts exceed 8.5 percent, making the country the fastest-growing in Africa and the second in the world after Myanmar.
With the return of the African Development Bank’s headquarters to Abidjan after a decade-long relocation to Tunis, Abidjan also stands to reinforce its position as a leading African financial hub, home to Bourse Régionale des Valeurs Mobilières (BRVM), WAEMU’s stock market—the best performing in Africa in 2015.
While Côte d’Ivoire’s dynamism has prompted investors to take a first step into FWA through the Ivorian economy, that move is also likely to benefit other markets in the region as investors seek opportunities in countries that have strong trade relations with Côte d’Ivoire.
For example, Mali is WAEMU’s second-largest country. Despite separatist tensions in its far north over the past five years, it has provided strong returns for select pioneering investors. These include Paris-based Investisseurs & Partenaires, which achieved a multiple of 3.5 times its investment in one of the leading pharmaceuticals distribution companies in the country, and Bank of Africa Mali investors who have realized a 120 percent return on investment to date since shares of the country’s largest bank debuted trading on BRVM last May. The offer was oversubscribed seven times.
The secret is out
After realizing FWA’s potential through the performance of portfolio companies operating in the region, investors, such as Nigeria-based African Capital Alliance, are gearing up to reinforce their presence in the 300 million consumer market and adding francophone investment professionals to their teams. At the same time, global frontier market investors such the U.S. government’s Overseas Private Investment Corporation (OPIC) are also setting up shop in the region.
While limited competition still allows for attractive entry prices and BRVM’s continued development provides an additional path to liquidity, a trending question in African private equity gatherings is now “parlez-vous français, ou dioula peut-être? (“Do you speak French, or Dioula perhaps?).
Note: This blog reflects the views of the authors only and does not reflect the views of the Africa Growth Initiative.
 Benin, Burkina Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo.
 Includes equity, quasi-equity, debt, and guarantees provided by commercial impact investors.
 Kenya, Ethiopia, Tanzania, Rwanda, and Uganda.
 WAEMU countries excluding Guinea Bissau.
 Based on March 8, 2017 reference price of FCFA 53,500 per share (Bulletin Officiel de la Cote de la BRVM).