A new Sh27.6 billion (US$400 million) Africa Fund is being raised by Aureos Capital - a private equity fund management company - to invest in emerging and frontier markets as a global economic downturn looms.

The launch comes at a time when the continent is registering the strongest economic growth in recent years, buoyed by solid economic reforms, periods of political stability and a commodity boom that has benefited many African countries.

The fund that will invest in businesses across Africa is looking to build on the successful track record of Aureos - which specialises in unlisted mid-cap businesses across developing economies - regional funds in East, West and Southern Africa.

The fund will seek to make investments of between Sh138 million (US$2 million) and Sh690 million (US$10 million) focusing mainly on companies with the potential to build pan-African businesses.

Sev Vettivetpillai, chief executive officer of London-based Aureos Advisers - which provides funds advisory services to Aureos Capital - said there has been great interest for suitable investment in Africa.

"Investors see the potential of what is the world's second most populous continent, with GDP growing at an average rate of between 5.3 per cent and 5.5 per cent. Furthermore, despite occasional setbacks, Africa's political economy has improved so its engagement in global trade and investment flows has also strengthened," said Mr Vettivetpillai.

His views echo those of AIG Investments, whose analysts pointed out that African stock markets continue to register strong performance, supported by decent earnings growth and improving economic performance.

In 2007, the sub-Saharan region enjoyed above average growth rates supported by rising oil production and revenues as well as increased capital flows and debt relief. International Monetary Fund (IMF) estimates that economic growth for last year was 6.9 per cent, which was above the global average of 5.2 per cent.

But with a global downturn looming this year, which is expected to hit developed countries hard, sub-Sahara Africa's economic growth stands to dampen slightly as rich nations reel from the effect of the US sub-prime market woes.

Sparked by losses linked to higher risk mortgages in the US housing market, billions of dollars in market value were wiped off last week as hedge funds, which had invested heavily in this risky market, liquidated their positions to meet debt obligations.

Consequently, the IMF this week cut its 2008 global growth projection to 4.1 per cent, down from 4.9 per cent last year, blaming the weak outlook on the United States and Europe. Nevertheless, the minimal correlation between developed markets and frontier markets such as Kenya, Malawi, Ghana, Botswana and Mauritius has made Africa's markets largely immune to the global market contagion.

Indeed, while developed economies slumped under the weight of sub-prime market woes last year, frontier markets returned double digit returns supported by decent earnings growth and improving economic performance.

But while global investors focus their investment scopes towards frontier markets, the risks associated with investing in Africa are ever so real as recently witnessed in Kenya, a country long viewed as a bastion of stability on a troubled continent.

Following unrest after the disputed presidential election, the harsh reality of risks associated with frontier markets kicked in as international rating agencies quickly lowered the country's credit ratings.

This cast doubts over the flotation of the country's first Eurobond worth an estimated US$300 million dollars and put a question mark on the international success of the Safaricom IPO.

While it had become clear that politics and the economic performance of frontier markets are intertwined, Africa has no shortage of profitable firms that offer massive returns to investors who are willing to weather the risks of investing on the continent.

"We are confident that there are great opportunities for investment at this level and are very excited about the prospects for our new fund," reckons Mr Vettivetpillai, adding that deals below Sh6.9 billion (US$10 million) were the firm's speciality citing the potential of excellent returns.

The increasing prominence of medium-sized enterprises in domestic supply and demand chains is making them particularly well-placed to achieve critical mass and, in some cases, to pursue regional and continental growth strategies.