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Applying “Eight M’s” philosophy

Anna Lyudvig
Oct. 22, 2020, 10:12 p.m.
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African Lions Fund closed its initial share offering on September 30 with 52 investors and approximately $3.7m under management. Africa Global Funds’s Anna Lyudvig speaks with Tim Staermose, CEO of the Investment Manager, ST Funds Management, to learn more about the new offering and investment opportunities in Africa.

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African Lions Fund closed its initial share offering on September 30 with 52 investors and approximately $3.7m under management. Africa Global Funds’s Anna Lyudvig speaks with Tim Staermose, CEO of the Investment Manager, ST Funds Management, to learn more about the new offering and investment opportunities in Africa.

Anna Lyudvig (AL): Why is it a good time to be launching a fund?

Tim Staermose (TS): Africa’s long-term prospects for strong economic growth, have not changed in my view.

This growth will be driven by a demographic dividend. Over the coming decades in Africa, there will be many more people in their productive working years, and fewer children dependent on them. Africa’s population structure today is almost identical to that in Asia in 1970. It unleashed an economic boom unlike anything the world had ever seen as Asia’s working age population tripled over 30 years. Countries went from poor to middle income and from middle income to rich within a generation in some cases.

Now it’s Africa’s turn. The working age population should double by 2050. Against this backdrop of excellent long-term growth potential, you have valuations for high-quality, publicity traded African businesses that are now the lowest in 10 years.

Africa is the only place in the world where I can buy high-quality growth assets at value prices. 

AL: What makes you stand out as a fund manager?

TS:  I have lived in the emerging markets of Asia and worked in the investment research and management business there all my working life. I also lived in Singapore as a child. I have seen how long-term economic development played out here. Africa is not Asia. And the script will be somewhat different. But the basic macro principles are the same. It’s about identifying development trends, and the countries that put in place the right structural and governance environment to best capture them. I think I can apply my deep knowledge of the Asian template, to what might happen in Africa.

To further increase our odds of success at the micro level, I have a very rigorous stock selection framework, based on my proprietary “Eight M’s” philosophy. 

- Macro (Is the macro environment in the country of operation favorable? If not, we pass.)

- Market (Does the business have a large enough potential market to double its sales and profits inside 5 to 10 years?)

- Model & Moat (Is the business model efficient, and does the company have a strong enough moat to keep earning superior returns on invested capital over the long term?)

- Management (Are the management team members ethical and competent, in business and in life? Are they the sorts of people I would do business with on a handshake?)

- Money (Is the company well funded with a rock-solid balance sheet, and ideally zero net debt?)

- Multiple (Does the company trade at an attractive enough current multiple of earnings or book value? It is conceivable that multiple can double on a 5 to 10 year view?)

- My fellow shareholders (What does the ownership structure of the company look like? If there is a controlling shareholder, does that shareholder treat minorities well. Are there sufficient shares freely floating that we can take a meaningful position?)

- My exit (Under what circumstances would we exit this investment? This must be well thought out ahead of time, for both the case in which we are successful with our stock pick, and where we have made an error and decide to reverse our decision.)

AL: Where in Africa do you see investment opportunities?

TS:  For me the sweet spots right now are in the Great Lakes region in East Africa. Namely, in Kenya, Tanzania, Uganda, Rwanda and Malawi. In West Africa, I am also looking at selected companies in Ghana, Cote d’Ivoire, and Senegal. Mauritius, Botswana, and Namibia are also home to companies on my current watch list. Nigeria is a market I am shying away from until they sort out their foreign exchange market issues. Zambia has similar issues at present keeping me away. As for Zimbabwe, there are stocks on my radar which operate there, but not ones trading locally. I would invest via overseas exchanges that list companies operating in Zimbabwe.

AL: What are the risks of investing in your fund?

TS: Currency exchange rate risks are top of my list of concerns. We denominated the fund in US dollars, so as to have a wide international appeal. That means that if we invest in countries that go through periods of exchange rate depreciation it will be a drag on our performance in US dollars. The low levels of liquidity in most frontier African markets is the other obvious risk. It can make it difficult to deploy capital, and to exit, at the prices we would like. 

I am also highly attuned to political risk. But in general, good companies will do well regardless of who is in political power. 

On a more fund-based level, we have an Australian licensed and regulated investment manager for the fund. I am the CEO of that firm. I am the key person for the fund. At this stage, being so small, there is not yet anyone who could fill my shoes were something to happen to me. That said, the board of the investment management company has been given clear instructions on what do in the event I become unable to manage the fund. 

The other risk is that we can’t scale sufficiently to spread the fixed costs of running a fund such as this. While it would have been good to start with a little more capital on day one, considering the tough market generally for frontier markets and that we’re in a period of high global uncertainty, we feel happy to have got the fund up and running with nearly $4m. We’re especially pleased that 52 investors from all around the world have shown confidence to back the fund. Already more are lined up in the wings to come in over the coming months. There is a steady stream of enquiries.

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