Leading global investors increasingly understand the case for African investments. A sustained growth rate of over 6% a year for the past 10 years is certainly compelling; but how to access that growth efficiently and effectively? Listed equity is the natural starting point, but cuts out several high-performing sectors. Nor is a geographic focus the best route given the small size of individual economies. A holistic view is needed, one that looks across countries, sectors and the three major investment channels, namely listed local equity, listed offshore equity and unlisted or private equity.
The attractiveness of listed markets
The most common way to gain exposure to a region is through local listed equity markets. While African listed equity markets are developing and certainly face challenges, strong returns and continuing growth expectations have encouraged investment and rewarded investors in recent years. Capital has flowed into frontier markets to access the higher growth expected from these regions.
As reported in the 2014 Bright Africa report (a guide to investing on the continent) the average listed market return over the last three years has been 16% (CAGR), outperforming developed markets by 4% annually (S&P 500 CAGR: 12%).
When looking at listed markets excluding South Africa, it is apparent that there is a large element of concentration risk within specific ‘exchange sectors’ across the continent. This is particularly true in financial services, where around 60% of the available market cap is concentrated.
Based on the investability of markets, if an investor decided to invest across the continent (excluding South Africa) this would result in a third of his or her capital being invested into the Nigerian financial sector, and a further 17% in Nigerian consumer staples.
The JSE, while providing the best reflection of the make-up of GDP in its sector representation, bears its own eccentricities due to the number of dual listed and foreign operationally exposed companies. Of the top 40 shares by market cap listed on the JSE, 40% of the revenue is derived from outside of the borders of South Africa. This is fairly common on global exchanges, but should be understood by investors looking to access African growth.
Accessing Africa from abroad
Energy and materials play a significant role in the African development story and still offer the value investors into Africa seek. Unfortunately, outside of South Africa, resources are poorly represented on the African exchanges, where financial and consumer sectors dominate.
However African energy and materials may be accessed on exchanges outside Africa. Often the motivation behind this is that, as mineral and energy extraction is highly capital-intensive, these listings take place on the more efficient and larger capital markets in order to raise funds. Exchanges such as London’s AIM and the Toronto Stock Exchange have positioned themselves to cater specifically to resources shares from across the world. The London Stock Exchange in particular is currently working on increasing the number of dual listings with various Africa exchanges.
Long-only asset managers focused on African markets realise this and usually attribute a portion of their portfolios to foreign listings of Africa focused companies. These listings, other than improving the exposure to resources, also increase the exposure to countries with underdeveloped bourses. They also introduce countries previously excluded, as they do not, in fact, have a bourse such as Mali and Angola.
Private equity investments
Private equity is becoming well established on the continent especially in large markets such as South Africa, Nigeria, Kenya and through North Africa. Countries with large GDP, but difficult business conditions are naturally finding it harder to attract private equity investment. South Africa is still the leader in private equity on the continent with historic returns of approximately 20% over the past 10 years, but West Africa in particular and East Africa to a lesser degree is attracting capital and investment and more transactions are happening in those regions.
The IFC Ease of Doing Business ranking and the IESE VC&PE Attractiveness Index ranking are useful measures already in place when assessing the attractiveness of a country to investment.
Though a major consideration, ease of doing business alone is not enough to create the necessary conditions for successful private equity investment. Factors such as economic growth, depth of capital markets, taxation and investor protections are all important and are included in the Attractiveness Index. Countries like Mauritius and Rwanda have scored well on the latest Ease of Doing Business ranking, but are relatively small and score lower on the other considerations necessary for private equity.
Of the 31 African countries ranked by the Attractiveness Index, 16 have achieved improved rankings over the 2009 to 2013 period, the most impressive of which were Rwanda and Mauritius (11 places each). Mauritius, South Africa, Tunisia, Morocco and Egypt feature in the top 60 countries out of the 118 ranked on the Attractiveness Index worldwide, while Rwanda sits at 93.
While African markets develop, investors should use several channels to access African growth. Local listed markets give good access to financials, telecoms and consumer staples in certain countries. Private equity allows stronger exposure to consumer discretionary as well as industrials and materials, and niche sectors such as healthcare and education. Certain other sectors such as some resources can further be accessed through foreign-listed Africa-focused companies.
– Rory Ord
Head of Independent Valuation, RisCura
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