What are the most popular channels of investment for Africa?

• Using specialist managers to access the Africa universe, investors can access:
  • Listed (Africa) equity
  • Private (unlisted) equity
  • Fixed income mandates
  • Infrastructure investments

The selection and combination of these vehicles would depend on the type of investor and their unique goals.

Which countries are seeing more investment?

• South Africa, Nigeria, Kenya and Egypt, and also (but to a lesser extent) Ghana, Botswana, Zambia, Morocco and Zimbabwe.

Why are these countries experiencing an influx in investment?

• Historically, the size of the specific country’s economy would have been the primary measure by which investors would assess the opportunity set. Recently, investors are more aware of the tradability of the markets as well as ease of remitting (no foreign exchange controls) as is currently the experience with the likes of Nigeria and what was experienced in Egypt soon after the revolution.Whilst the economies of Botswana and Zambia are larger than Zimbabwe, the Zimbabwe Stock Exchange (which trades in United States Dollars), features much higher trading volumes than the aforementioned and comes without foreign exchange risk. Similarly, whilst the oil and gas nations of Angola, Nigeria and Mozambique are prominent in most measures of GDP growth and per capita GDP, all of these countries have recently faced extreme economic stress with the current oil slump. Should an investor wish to get public market exposure to these oil-rich countries, only Nigeria offers a listed entry point, with no stock market in Angola and only four companies currently listed on the Bolsa de Valores de Moçambique (BVM). Nigeria is the largest part of the Africa listed index and, before the fallout from the oil slump, it formed a major component of most African portfolios. Subsequent to the crash of oil prices and resulting slowdown of the Nigerian economy many managers reduced their exposure to the country in 2015. Countries that benefitted from increased exposure are mainly Kenya and Egypt and more limited, then less liquid markets in north and southern Africa.

Which funds target African investment?

• We see mostly developmental funding institutions (DFIs), larger and more sophisticated pension funds with a long-term investment horizon and Middle Eastern sovereign wealth funds invest in Africa. American, European and Australasian family offices are also taking a serious look at Africa, alongside Chinese companies and African pension funds themselves.

Where do these funds invest?

• RisCura’s Bright Africa is a research endeavour that looks specifically at Africa’s pension funds, where they’re investing and why. The report shows that in most OECD and many non-OECD countries, bonds and equities remain the two most prominent asset classes for pension funds. While globally there is a larger allocation to equities (42.3%), the picture in Africa is more disparate. Broad asset allocation in sub-Saharan Africa has favoured equities, the allocation of which has shown a steady increase alongside the development of capital markets and regulatory change. In Nigeria and East Africa asset allocation is dominated by fixed income allocations, which predominantly constitute local bonds. When viewed alongside the high asset-growth in these regions, this is illustrative of regulation as well as local investment opportunities. It also typifies one of the larger challenges pension funds face; identifying appropriate local investment and development opportunities at the same pace as asset growth.

What are the opportunities in private equity?

• The increase in private equity fundraising in 2015 is evidence of the strong interest in investing in Africa’s real economy, despite the recent turmoil in which many African countries find themselves. In the face of the decline in commodity prices, oil in particular, currencies have come under strain impacting liquidity and trade. The slowdown in the growth of emerging market economies in general, has not inhibited the ability of African investment managers to attract significant amounts of capital for the larger Pan-African funds as well as Sub-Saharan Africa funds. Some of the largest African private equity funds seen to date were closed in 2015, including Helios Investors Fund III ($1.1bn), Abraaj Africa Fund III ($990m) and African Development Partners Fund II ($725m). Investors making commitments to Africa may be flocking to these experienced managers as a way of mitigating their risk, knowing that the next few years are bound to be a more difficult time for the continent.

What are the opportunities with devaluating currencies?

• While some African countries that are considered great investment opportunities have seen recent currency devaluation, this could create an opportunity for African manufacturers.  Import substitution has been a significant part of Africa’s economic growth during the preceding decade, as seen, for example, by Nigerian based Dangote Group, currently manufacturing cement, sugar and flour. All of these items were previously imported by Nigeria even though most of the raw materials are readily available locally. Other opportunities may exist in petroleum, packaging and primary agriculture to name a few.

 

-Prasheen Singh

Executive