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Africa funds take heart
Thursday, 01 Nov 2007
As the largest ever flow of money from the international investment community sweeps into Africa, this year is set to be a watershed year for fundraising in the continent.
Funds focused on Africa took in US $592 million in the first six months of the year. In July a further two large pan-African funds closed - one for $1.3 billion by South African investment firm Pamdozi, and another for $523m by Emerging Capital Partners. South African funds are raising $1bn, according to the Emerging Markets Private Equity Association (EMPEA).
New Star Asset Management’s new "Heart of Africa" fund, launched in London in October, joins billions of dollars flowing into African financial vehicles destined for the institutional and retail market.
The sub-Saharan fund specifically targets the continent’s growth markets. It will invest in Zimbabwe, Congo, the Democratic Republic of the Congo (DRC), Zambia, Botswana, Senegal, Ghana, Namibia and oil-rich Nigeria. It will also look at five AIM-listed stocks already exposed to the region, including the Central African Mining & Exploration Company (Camec).
"Some emerging markets such as eastern Europe are no longer emerging - they are on the verge of being developed - so Africa is garnering more attention as the new frontier," says John Dawe, head of investment communications at Charlemagne Capital. The firm launched its Magna Africa Fund at the end of March. By the end of August, managed assets had reached $120 million.
"We are looking for inefficiencies in the African market, whether it is in DRC mining, Egyptian real estate or Nigerian banks. A burgeoning middle class and investments in infrastructure from the sales of commodities, such as gas and oil, is driving demand."
Already private equity fundraising in emerging markets is on pace to set a record this year. In response to global demand, companies such as Stanlib, the asset management arm of South Africa’s Standard Bank, New Star, Investec and others are buying up African equities, as well as the shares of local businesses listed on the continent’s stock exchanges and beyond. The plan is to build up a pipeline of African investments with private equity spearheading the charge.
But even the strongest advocates of these funds concede there are risks. It is difficult in Africa to sustain high-quality deals with an acceptable cost base and maintain economies of scale.
"Unless you know what you are doing and have strong and reliable local contacts leave your money in the bank," says Keith Gubbin, director at Africa Asset Management. "Private equity is one of the only routes to gain long-term, strong returns, but deal flow and management is extremely hard work and cannot be done by remote control."
Gubbin and others suggest investing on a regional rather than country basis, so as to reduce the risks and employing a strong, trustworthy local team that knows the market conditions on the ground. Others believe that private equity and particularly infrastructure investments will provide especially attractive returns over the long-term.
Structural surge
In the past, Africa has been held back from attracting significant investment because of difficulties with unstable political environments, corruption, civil unrest and insufficient regulations.
"Africa has simply not figured on investors’ radars for a significant period of time," says Andrew Lister, investment manager at Progressive Developing Markets. "A lack of research, liquidity, suitable products and appetite are essentially to blame."
These factors are on the decline, however, and macroeconomic reform and economic trends have been consistently positive over the last few years. Successful elections in Zambia, Sierra Leone and the Democratic Republic of Congo reflect an improving political climate in Africa. Global commodity prices have also soared boosting resource-rich Africa, while debt levels have been dropping. Malawi, for example, has seen its $3 billion debt written off - equal to 100% of its GDP. Plus the funds themselves are also usually regulated in a Western domicile, which gives additional regulatory comfort to investors.
"Africa has snowballed - the market saw initial funds doing well and competitors were then keen to replicate it. Finally there is a realisation that Africa is worth investing in - it is now the latest thing. It could have equally happened a year ago," says Dawe.
This time, analysts are convinced that the recovery is not cyclical in nature but structural, and hence one ripe for successful investment.
This year the International Monetary Fund (IMF) forecasts GDP growth of 6.2% for Africa, compared with 4.9% global growth and 2.5% for the advanced economies. Seven of the world’s 20 fastest-growing economies are also in Africa and more than 60% of the countries are now functioning democracies. To top it all governments are now actively encouraging foreign investment as a way of promoting development.
"A Russian IPO is no different to a Nigerian IPO, we just see it as an investment opportunity," says Dawe. "You can quantify risk -- risk it is something that emerging market investors are used to."
Investment sectors move upstream
The continent has also benefited from the rapid growth of the global economy, particularly China and its inexhaustible need for resources from oil to copper and diamonds. China is also investing heavily in African infrastructure in return for access to these raw materials. Tourism to the continent has also increased significantly.
Yet the recent launch of three Africa-focused funds from Charlemagne Capital, T Rowe Price and Lyxor shows a growing trend -funds are now diversifying away from the primary sectors. Even though commodities dominate African economies, fund managers are keen to move beyond their associated prices fluctuations and into sectors that offer even better growth. The favourite picks in the Investec Africa fund, for instance, include Egyptian mobile phone operator Orascom and Nigeria’s Access Bank
"Many of the African economies are more diverse than investors think," says Lister. "Governments have been shrewd in their use of windfall revenues from energy and commodities, so this does not keep us awake at night."
While agriculture, mining and tourism still drive much of the African continent, the success of these sectors has also led to the development of others, as has the rise of the middle classes in countries such as Nigeria, Kenya and Ghana. This cascade effect has led to an increasing demand for banking, brewing and cement (BBC).
Telecommunications are also flourishing, with mobile telephony is at the fore as fixed-line companies privatise and diversify. Mobile phone companies are also piggybacking over the lack of infrastructure evident in some countries. In 2000, there were eight million mobile phone subscribers in Africa. By 2006 this had skyrocketed to more than 100 million. In the past six years, internet connections have trebled in Tanzania and have doubled in many other African countries.
"Investing in mining and agriculture is not as good as the returns you get from BBC and telecoms," says Michael Power, strategist at Investec Asset Management. "These sectors were hugely monopolistic, but the situation is changing fast, they are liberalising and in some countries they are already well developed."
Starting from a low base of reform and industrialisation, Africa may have a long way to go, but fund managers are now eyeing the continent’s developing secondary sectors. There is already growth in packaging, leasing and transportation. Since growth is coming from a low base, there is also huge potential to expand further.
Limiting the limitations
For all the good portents pushed by specialist fund managers from London to Cape Town, sub-Saharan Africa’s countries still fill up many of the bottom positions on the World Bank’s annual reports on the ease of doing business. For most institutional investors, Africa still does not figure largely on the global investment scene.
Aside from South Africa and Egypt, there are very few markets that are of any size particularly relevant for a global portfolio. As a result there is still very little research available from the global investment banks. Many African countries do not even have stock exchanges. Countries that do tend to show a lack of liquidity, bar Nigeria and South Africa. Buying and selling African stocks can also be a cumbersome process.
"There just isn’t the liquidity on African stock exchanges to warrant their interest," says Dave Lenigas, CEO of Lonrho PLC. "This is why institutions are looking at direct project investment, as opposed to the traditional equity investment routes."
For those that are aware of the opportunities in Africa, there is not always an accessible product through which to participate. This is partly the reason why there has been a recent flurry of funds - to help investors access these growing economies.
Currently, Africa’s money markets are becoming less attractive as economies develop. This is because Africans are driving their own markets and putting money into private equity. As inflation, as well as interest rates fall they are making the money markets less attractive.
Isolation a virtue
The slips and slides that investors have recently experienced on the global markets from Tokyo to Wall Street have also been good to Africa. The continent’s equity markets and currencies now look more attractive since economic sentiment in Africa is fairly isolated from the world economy. African markets also have low correlation to one another. For instance Egypt, Nigeria and Morocco, have little or no connection.
"African equities provide above-market returns that are historically uncorrelated to the US and other global economies," says Max King, global investment strategist at Investec. "For example, Africa was not affected by the recent turmoil in the US sub-prime lending markets."
Corporate governance is slowly but robustly gaining acceptance among African companies, as codes of conduct are adopted. Investors are also actively searching for companies that improve corporate governance.
Undoubtedly good practices, which money markets rely on, have been helped by the African diaspora that has returned to the continent from overseas. This generation of Africans has cut their teeth in the City of London or on Wall Street. They are now using their expertise, contacts and good practices to invest back home.
Well-educated and used to western-style economics, this legion of returning Africans are now being given jobs and status commensurate with their abilities. This robust expertise is now feeding back into Africa’s growing economies and meritocracies instilling confidence and optimism among investors.
Jenny Ligunda, a Tanzanian native, is among them. She has gone back to Dar es Salaam to work in finance, after living in Switzerland.
"I have come back due to the quality of opportunities on offer and the chance to experience an emerging market", she says.
Africa’s fund hotspots
Nigeria: The strength of political and economic reforms in Nigeria is astounding. The country’s Intercontinental Bank is one of the fastest growing in the world. Oil prices are at an all time global-high and Nigeria is Africa’s largest oil producing nation. It is a big country with a large population so the scale of business is good. There is also a relatively high degree of consumer sophistication, as well as an educated local work force, rules that tend to work, and English is the lingua franca.
Tanzania: Recently, the east Africa nation has gone through economic reforms, privatisation and trade liberalisation. There is potential growth in natural resources, driven by demand from China and India. Tourism also has potential.
Ghana: The country has good governance and is ripe with resources including gold. It also has a burgeoning middle class. The discovery of oil has come at a time when stable economics are well established. It is also an easy place to operate.
Kenya: The economy is still managing to grow despite political issues and jitters that affect the business culture. Many small businesses, diversified sectors, an entrepreneurial spirit and a growing middle-class have spurred on investor confidence.
Angola: Analysts are looking at the country in the long term. Already it is Africa’s second largest producer of oil. It could be Africa’s largest petroleum producing nations in the future. The government has also tabled a program to reform and privatise its vast public sector, which accounts for a staggering 250 companies.
Zimbabwe: For the brave and risk takers. High risk but potential high-return - there is a lot of money and funds waiting for when the economy and politics takes a turn for the better.
Analysts also tip Mozambique, DRC, Equatorial Guinea and Uganda as prime hotspots.
NOW CLICK HERE:
www.charlemagnecapital.com
www.empea
www.imaraholdings.com
www.investecassetmanagement.com
www.lonrho.com
www.newstaram.com
www.pamodzi.co.za
www.pro-asset.com
public.lyxor.com/en
www.troweprice.com
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