By Stephen Jennings

Good morning and welcome to Renaissance Capital’s Annual pan-Africa conference. Over the next two days you will have the opportunity to meet with 15 of the most dynamic enterprises across Africa. Represented at the conference are senior management of companies and finance from Nigeria, Ghana, Zambia, Kenya and Zimbabwe. They are building businesses in banking, telecoms, consumer, transport and hospitality.

The strength of the businesses, and the extent of the interest from the investor community here in London, demonstrates, I think, how rapidly Africa is emerging as an investment opportunity. Corporates and banks are plugging into, and in several cases leading, some of the most profound changes taking place in the global economy today. Institutional investors are increasingly recognizing the scale of the opportunity and the benefits of becoming involved at this relatively early stage.

Let me use this opportunity to elaborate on some of these global trends and explain how African business is increasingly at their forefront.

We are sitting here in London, one of the two main capitals of global finance, and the financial centre of Europe, still the world’s largest single economic bloc. We are discussing Africa, a region which has benefitted least from the revolution in global finance and is still considered to be among the most risky investment environments globally.

Yet if we were to close our eyes for a second and forget the legacy of both regions and focus instead on the hard numbers, we might be a little confused about which is the centre of global finance and which is the risky investment environment. One has an economy which is smaller now than it was five years ago, a budget deficit of 10% of GDP, public debt to GDP of 80%, unfunded liabilities of 200% of GDP, a population which is aging and can’t afford the size of its public sector, industry which is protected and a paralyzed government in the middle of a political crisis. The other has enjoyed average real growth of 6% per annum for a decade, a savings rate of nearly 25% of GDP, debt measuring less than 25% of GDP, a young and growing population, massive internal investment and a political system which is more stable now than it has been in 50 years. A simple question might be where would you like to invest your money? But I guess you are already asking that question.

Part of the opportunity that I see in Africa today is because of the improvements in the investment environment made over the last decade. But most of the reason for my enthusiasm for Africa is because of how I expect Africa to develop over the next 20 or 30 years. In my opinion, Africa is the region that will benefit most from profound changes taking place in the world today.

There are two inter-related trends which have defined the global economy for the last 20 years, and which will likely only accelerate over the next 20. The first is the widely recognized, but still under-appreciated, transformation of the economies outside of the developed world. 20 years ago the rest of the world outside of Europe and the US – 80% of humanity – accounted for 30% of global GDP. Today they account for 50%, and account for closer to two-thirds of the incremental value added.

Yet despite the scale of the numbers involved, the process has barely begun. GDP per head outside of the developed world is still less than 20% of that within it. Despite all of the hype that has surrounded the transformation of the Chinese economy, the relative value added of the average Chinese is still only 8% of that of the average American. If we make the unchallenging assumption that the developed world economy grows at an average of 2% per annum over the next 20 years, and that average value added per person increases in the developing world to 33% of the developed world, then the total increase in gross value added during that period will be 2000 trillion dollars in today’s dollars – 3 times what it was over the previous 20 years, which was itself the fastest period of wealth creation in history.

Moreover, this process of convergence between per capita incomes in the West and those in emerging markets is both accelerating and broadening. In terms of speed, today countries regularly set and achieve 10% growth targets, something that was inconceivable outside of China until quite recently. In terms of breadth, the rapidly converging emerging markets are now the rule rather than the exception, with the non-participants limited to countries with extreme regimes like Zimbabwe and North Korea.

The second major global trend is less widely recognized, although it is arguably having a bigger impact on global markets – the growing realization that Western economies are not able to support the expected living standards of their people. The fall of the Berlin Wall and the break-up of the Soviet Union 20 years ago began a period of unparalleled hegemony of the West. Economically, militarily and politically, the West was unchallenged. It seemed only a matter of time before the rest of the world adopted a similar economic and governmental model. As Francis Fukuyama famously put it, the moment appeared to mark the end of history.

But what is becoming increasingly clear is that the Western model is not able to survive in the emerging global economy – at least not without substantial structural reform. The credit crisis out of which the global economy is just now beginning to emerge was, at its most basic, caused by households in the West attempting to maintain living standards by borrowing too much. The government debt crisis in the West is the result of similar excess borrowing by the public sector, the failure to improve flexibility of their economies and finally the state absorbing much of the debt of the private sector. Europe is suffering stages two and three of this disease.

Starting with Greece, but likely to spread, markets are beginning to question if governments can afford to maintain the size and standard of their public sectors. Countries able to recapture competitiveness through devaluing their currencies may put off the day of reckoning for a while longer. Those in Europe without that option will find themselves in the front line as markets become increasingly assertive and ask the question: is their capital best allocated to fund government borrowing programmes.

To me, the answer is clear. When capital is offered the choice between the high growth and low leverage of the new economies driving global growth, or the slow growth, high-leverage and structural inflexibility of the developed world, it will become increasingly impatient with the old model. The developed world will be forced to either restructure its economic model to compete in the emerging global economy, or face an increasingly torrid time of crisis, inflation and rapidly rising funding costs.

So what does this mean for Africa? Capital is likely to become ever more mobile. As volatility increases in the traditional safe-havens, capital will prove more willing to look for less obvious opportunities. It will increasingly be sourced from within the economies generating the savings, most of which are in the emerging world. It will be managed by new types of institutions with possibly different targets than the current institutional model. It will be increasingly intermediated in the emerging markets, particularly Hong Kong, and considerably less in London. So capital is likely to flow in very different ways in the next wave of wealth creation than it has in the past.

I believe that for Africa, the opportunity this presents is tremendous. Most of the continent now has the stability and has built the governance structures to build large-scale capital flows to the level where it is possible to measure risks appropriately. In recent years, more and more capital has been flowing into Africa, and unlike in the past, this capital is not entering for ideological reasons but simply to build business. In the couple of years before the credit crisis, more and more funds were looking at Africa. This conference shows the speed at which interest is returning and with which the global investment community is engaging with Africa.

This trend should not be surprising. 12 of the top 25 fastest growing economies in the world over the next 5 years are expected to be in Africa. In 2007, sub-Saharan Africa received more Foreign Direct Investment than India, despite having only half the population. Trade with the rest of the emerging world has boomed, particularly with the new motor of the world economy, China. Ten years ago, total trade with China was less than USD10 bn. Today, it is more than USD100 bn. A ten-fold increase in 10 years. China can become to Africa what the US has been for China – a market for its output and a source of capital and know-how.

Africa is going down the same pan-regional development path that Asia entered in the 1960s. And to those of you inclined to cultural explanations of economic development, let me remind you that at that time Africa was ahead of Asia in terms of per capita income, conflict, life expectancy and growth forecasts. And despite the very major differences between countries within Africa I do believe this is a pan-regional phenomenon. Virtually everywhere I travel in Africa I see the same virtuous cycle of increasing the domain of the market, growth, pressure for improved policy and rising aspirations.

The other key dimension of this process is its speed. Simply remember that since 2000 Ethiopia has grown faster than China and that half of the fastest-growing economies in the world are in Africa. Four years ago when Renaissance began highlighting the accelerating growth in Africa the naysayers pointed out the cyclical role played by commodity prices. Yet, during the recent crisis Africa was the only region in the world not to experience a single quarter of negative economic growth, notwithstanding the collapse of commodity prices. So, what is driving the transformation? Basically, Africa stands to become the biggest beneficiary in history of the faster transmission and increased mobility of ideas, economic models, technology and financial and human capital. Taken together, these influences provide all that is required for poor African countries to join the ranks of the world’s middle class societies. This logic together with Africa’s existing growth track record suggest to me that Africa is likely to become the fastest growing region in the world in the not-too-distant future.

Of course, it hardly needs repeating that the African opportunity comes with large associated risks. The sheer complexity and speed of change inevitably brings with it dislocation and volatility. Governance structures are much improved, but they have not yet been fully tested against the sort of volatility and structural change that is likely to characterize Africa’s different economies over the next decade. While markets have proven time and again their astounding ability to create value, they also necessarily involve considerable destruction amidst the wealth creation. It will always be tempting for governments to meddle – to protect domestic champions, to pick winners, to distribute more fairly, or simply to get a slice of the pie. The more they meddle, the less the creative destruction which can drive economic growth.

So where is capital going to be most efficiently allocated? Will capital be attracted to a debt-laden, protected, uncompetitive economy facing tremendous structural change? Or to a dynamic, fast-growing, unleveraged economy which is increasingly demonstrating that it is at the forefront of global change? The answer to me seems clear, and it is in that sense that Africa is, I believe, the most exciting investment opportunity in the world today.

At Renaissance Group and Renaissance Capital, we are putting our money where our mouth is. In South Africa, we are acquiring BJM Securities, the leading independent broker and No. 1-ranked research team, and combining this with the former Merrill Lynch equities management and trading team. We are building out in other Sub-Saharan countries and adding to our strong on-the-ground country and industry bankers. This is all part of our build-out of the leading pan-continental securities trading and investment banking platform. We also continue to add to our already extensive principal investments portfolio.

Above all else this is a long-term commitment and a commitment to work with all of you to participate fully in the incredible African investment opportunity.