The slow pace of electrification is the Achilles’ heel of the African growth narrative, writes Johan Steyn, Africa Fund Manager at Prescient Investment Management
Analysis & Strategy
The current market environment in Africa is creating strong investment opportunities, write Harry Wulfsohn, Executive Director Imara Holdings Ltd (pictured) and Stuart Theobald CFA, Imara Guest Analyst
Post Mozambique’s independence from Portugal and its emergence from civil war, the government focussed on creating legal frameworks governing land while encouraging investment. The rationale behind the Mozambican Land Law and its Regulations was to protect land rights of communities, women and farmers. There is therefore no private ownership of land in Mozambique. In terms of the legal system, land and its associated resources are the property of the State and cannot be sold, mortgaged or alienated in any way. The Land Law however, provides for a lesser real right - the right to use and benefit from the land known as Direito do Uso e Aproveitamento da Terra (DUAT). DUATs provide their holders with the right to use the land for specific and authorised purposes subject to certain limitations imposed by the Land Law.
What are some of the stumbling blocks and complexities faced by private equity managers working towards an exit in Africa?
Over the last two decades, African private equity (PE) has emerged as an expanding asset class, both in funds raised and capital deployed. Last year alone 145 transactions worth a combined $3.8bn were announced. Its evolution has been underpinned by the enduring commitment of DFIs, local and international development banks and favourable growth trends, such as population growth, steady increase in disposable income, diverse (and expanding) economies, new and untapped markets - all unique to the African landscape.
Development finance institutions (DFIs) have traditionally been cornerstone investors in African private equity, helping to stimulate the local private sector by providing a way for small and medium sized enterprises to access capital. Over the past few years a few very large and well-known fund managers have been able to reach a first close without DFI capital. However, there has since been a significant downturn in macro-economic performance and an increase in instability in emerging markets that has tended to reduce global capital inflows into Africa.
For the last eight years, Mediterrania Capital Partners has focused on Capital Growth markets in North Africa and Sub-Saharan Africa, characterized by consumption-driven economies, pro-business policies, rapid urbanization, favorable demographics, and growing consumer classes.
In 2016, African Infrastructure Investment Managers (AIIM) sold investments in three privately-concessioned toll roads in Southern Africa to a consortium of largely existing investors including Public Investment Corporation, Liberty Group, Old Mutual and Africa Finance Corporation. The sale, which was structured via the South Africa Infrastructure Fund (SAIF), represents the largest private equity realization for toll road infrastructure in Africa to date.
It has now been two and a half years since the US Dollar began its +25% appreciation and the underperformance of African equity markets feels as if it has no end. Experienced Africa hands say the past period has been one of the toughest (and probably the most disheartening) to their knowledge. Given the record number of fund closures and dismal equity returns since mid-2014 (down 45%), investors are wondering whether Africa really is “reeling” rather than “rising”.
Southern African Private Equity and Venture Capital Association (SAVCA)/ Webber Wentzel PE data for the first three quarters of 2016 shows 140 deals reported across the Sub-Saharan Africa (SSA) region. A third of these were in South Africa, but Nigeria, Kenya and Namibia also featured prominently. Statistics show a significant year-on-year increase in deal flow.
Listed equity markets in Africa (excluding South Africa) present an opportune environment to add investment-alpha (fund returns exceeding the benchmark’s returns). Public disclosures are minimal compared with developed markets, and the research burden of on-site due-diligence is high. These factors lead to relatively inefficient markets, which can be exploited by a skillful manager willing to invest the time and resources required to uncover mispricing opportunities.
The 2008 global financial crisis occurred largely due to an increased level of counterparty credit risk and the inability of counterparties to stand good against their obligations. Approaching a decade on, financial market players should be fully aware of the regulatory ramp-ups and reforms being implemented to negate against anything similar happening in future.
Indexation is growing at a rapid pace globally and it is thought that most developed market investors are selecting index tracker funds as their default investment options these days. With data moving more freely and frequently in the world, the range of rules-based and transparent indices being developed have increase rapidly, focusing not only on market cap indices, but also ESG, smart beta and multi factor and multi asset solutions.
As human beings, we are continually evolving and modifying the societal norms that we live under. What would have been considered normal in the last century or even a decade ago can be quite different today. How business is done, from how companies are run to how investors invest in them and engage with them is also evolving and driven by the changes we see in societal norms. We could consider it a maturing of our society. Where we live also has a bearing on that, which is probably why when investing I have always considered some sort of responsible investing, even if the what it is called and how its defined has evolved with time.