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June 8th, 2012
Post-conflict investing may deliver peace dividend
By Thomas Kostigen
SANTA MONICA, Calif. (MarketWatch) — There is great opportunity for huge rewards by investing in post-conflict zones. Besides making money, these investments can make the world a whole lot safer.
Post-conflict zones are places that have gone through war, revolution, or civil unrest — places where there is lingering political uncertainty and where the environment is fragile.
Here’s why investing in such “difficult” areas is so important: “Economic development is a critical component of promoting stability and U.S. security interests, particularly in conflict and post-conflict zones,” the Council on Foreign Relations argued in a working paper on the issue released last month. “Reviving institutions and rebuilding an economic base are among the first priorities after fighting ends and reconstruction begins.”
According to the U.S. Agency for International Development, negative economic shocks of just 5% can increase the risk of a civil war by as much as 50%. The CFR noted that means donor assistance, which can account for 20% to as much as 97% of a country’s gross domestic product “is unsustainable in the long term.”
Far better, it says, is to build local business capacity and support home-grown entrepreneurs who can help curb this risk.
“Research from Iraq has found that labor-generating reconstruction programs can reduce violence during insurgencies, with a 10% increase in labor-related spending associated with a 10% decrease in violence,” the CFR says. It quotes Shari Berenbach, director of the Office of Microenterprise Development at USAID, as saying the development of “private enterprise is an important stabilizing force,” particularly for countries suffering from the political uncertainty and civil unrest that often characterizes the post-conflict period.
Moreover, there is money to be made.
A report released this week by Wharton’s “Knowledge” publication says, “Whether investing through traditional mutual funds or aggressively deal-by-deal, global investors are increasingly seeing Africa as the next horizon of opportunity. Six of the world’s 10 fastest growing economies over the past decade were in Africa. Africa’s middle class, already spending as much as US$680 billion annually, is projected to grow to 1.1 billion by 2060, up from 355 million in 2010. This year alone, Africa’s economy is expected to grow at a rate close to 6%. For global investors, Africa’s impressive growth has made it a necessary part of their portfolio.” Read more about Wharton’s report.
And that’s just Africa, never mind the Middle East and other post-conflict zones.
Last year, Wharton, the well-known business and finance school, also held a panel on “The Frontier of the Frontier: Investing and Building Businesses in Post-Conflict Countries” at its Africa Business Forum, which explored different ways investors can get involved in Africa’s growing frontier markets. The panel found that 158 pension and insurance funds, hedge funds, wealth managers and private banks said they would explore investment in Africa sometime within the next decade, and one third of investors surveyed said that they planned to put at least 5% of their fund value into Africa by 2016.
Some investment managers are already entering the fray.
Take ManoCap. It is a private-equity fund manager that makes equity investments in small- to mid-cap enterprises in West Africa. ManoCap manages two funds: the Sierra Investment Fund and the ManoCap Soros Fund.
SIF is a multisector fund (excluding mining) that focuses on investing in Sierra Leone, Liberia and Ghana. The ManoCap Soros Fund invests in agribusiness and related services in Sierra Leone.
And make no mistake, these aren’t strictly do-good vehicles. “All things being equal, we will always prioritize a 70% IRR [internal rate of return] over a 20% IRR. Underlying the creation of our business is the belief that meeting development goals is impossible without investing in profitable businesses,” ManoCap states.
A quick look at Maplecroft’s Global Risk Atlas 2012 and it’s easy to spot the regions of extreme and high risk: they spread throughout Africa and spill into the Middle East, bleeding into Southeast Asia. See the Global Risk Atlas.
At one time this might have meant “stay away” but increasingly it’s cause for investment.
Indeed, more investors in post-conflict zones might just keep them that way and prevent more wars from erupting.
original source: http://www.marketwatch.com/story/post-conflict-investing-may-deliver-peace-dividend-2012-06-08