#6 Perceived vs Actual Risk
Summary - 10 seconds
Core takeaway: There is a significant gap between perceived and actual risk in Africa, driven by generalized fears that don’t reflect the uniqueness of its 54 countries. As a result, despite being home to 11 of the world’s 20 fastest-growing economies, Africa remains underinvested, with only 0.5% of global private equity and venture capital flowing there — leaving valuations low and substantial opportunity on the table.
Detailed Overview - 3 minutes
On March 10th, 2023, Silicon Valley Bank collapsed. I was trading regional banks at the time, and as I sat on the trading floor in New York, panic spread rapidly across the market. Traders were hitting bids on anything they could, fearing a broader contagion stemming from SVB's failure.
Charles Schwab — one of the nation’s highest rated banks — lost $47 billion in market capitalization in just one month. This wasn't because the bank was close to collapsing, or even because it shared SVB’s business model. It was simply because investors perceived heightened risk across all banks and began panic selling. Over the following months, as investors reassessed Schwab’s fundamentals and recognized the durability of its business, both its stock and bonds rebounded strongly, making it one of the best performing banks in the country. Today, Schwab has regained $73 billion in market cap since the lows in 2023 and the investors who took the time — in the midst of widespread fear — to examine the balance sheet and understand Schwab’s sound financial position, realized that the perceived risk far exceeded the actual risk and made a 90% return in just over 2 years.
A similar disconnect exists in Africa — a gap between perceived and actual risk. When many investors consider putting money into African markets, they fear that their funds might disappear, that property rights won’t be upheld, that businesses will struggle to maintain intellectual property, or that corruption will make tax obligations unpredictable. I shared these fears. But after visiting the continent, I realized that while those issues exist in some places, they are far from universal. Africa is made up of 54 countries, each with its own political system and business environment. Unfortunately, by lumping the entire continent together, we’ve created a mental model where perceived risk is extremely high — even though, in many countries, the actual risk is far lower.
What does this mean for investors? Valuations — especially outside the tech sector — remain low, with too few investment dollars chasing a wealth of opportunities. Africa houses 11 of the 20 fastest growing economies in the world yet receives only 0.5% of global private equity and venture capital. Africa will see significant growth over the coming decades; the only question is who will be involved?