While the last couple of years have been tough for African equities and currencies, we believe the long-term case for investing in Africa remains intact. The worst commodities bust in a generation, the strengthening of the US dollar and indigestion in frontier and emerging equity markets have left many African stocks trading at valuations not seen in years.
With less than a month to go before they have to disclose an Effective Annual Cost (EAC) on quotes for savings and investment products, product providers are no doubt scrambling to get their calculations done and their point of sale documentation updated. The deadline is October 1 to comply.
The provision of banking and financial services in South Africa is a highly regulated activity and the revolutionary Fintech (financial technology) is posing a significant challenge to the current regulatory framework. The challenge has been acknowledged by the South African Reserve Bank (SARB) in its position paper on virtual currencies issued in 2014.
The recent loss reported by Och-Ziff Capital Management Group, the largest publicly traded hedge fund in the US, was attributed to a $400m provision to settle bribery charges brought by the US Department of Justice related to the fund’s dealings in Africa. Paradoxically, while news like this has nothing to do with hedge funds in Africa, it reinforces the uncomfortable fact that skittishness from investors outside the region means that hedge funds in Africa are held to the highest standard.
If you own equity in South African companies that derive most of their income from business activities within South Africa, you might need to start adjusting your thoughts about what they are really worth, despite their current market prices. According to African investment specialists RisCura, the fundamental value of such equity investments have declined by as much as 49% in dollar terms between December 2014 and March this 2016. Yet this is not being reflected in asset prices.
Short-term effects of Brexit were visible: lower commodity prices, higher yields on dollar bonds, rise in trade deficits, likely freezing of development assistance and Tanzania’s refusal to sign up to the East Africa Community Regional Trade Agreement, after 14 years of negotiations. Nigeria and South Africa account for over 52% of UK’s trade with Africa and so felt turbulence most. This led to immediate risks for contracts with African stakeholders, to be assessed promptly by asset managers and investors. Renegotiation may be only one solution.
Investors involved in cross border merger transactions in Africa should note that, depending on their existing investments and the activities of a target company, they may have to comply with the merger regimes of up to three different competition regulators.
The potential of private equity investments continues in Africa, despite the continent’s lower GDP growth rates, and the effects of falling commodity prices on commodity-rich countries.
While fundraising activity in Africa dipped slightly last year (mirroring a trend common to most emerging markets), private equity continues to play an important role in the region, as investors look to diversify into some of the world’s most remote—but also most promising--economies. This is a trend that has played out steadily over the past several years, with the African Venture Capital Association (AVCA) reporting a robust 823 PE deals between 2010 and 2015, representing more than $21bn in value.
Traditional financial institutions are struggling in emerging economies: annual loan growth has slowed from 18% to 12%; local currencies are in decline against the dollar, and long-term problems of accessibility remain unsolved. Only a few months ago, a high-profile merger between Standard Chartered and DBS was scrapped because of the former’s exposure to these volatile markets.
“What improves the circumstances of the greater part can never be regarded as an inconvenience to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable,”- Adam Smith, The Wealth of Nations.
The Financial Services Board (FSB) has finally reached the implementation phase of the Solvency Assessment and Management (SAM) framework and insurers are expected to be ready to comply with their SAM obligations. So far, discussions around the implications of SAM have centered largely around insurers, with little focus on other significant industry players, such as private investment funds in which insurers may invest their capital.
We are ‘bottom-up’ investors who pay more attention to valuations than to macroeconomic forecasts. We do extensive research to calculate what we believe is intrinsic value (the underlying worth or price you would pay for the business), and buy assets when the discount between this intrinsic value and the market price is sufficiently large to limit downside risk.
Historically, international investors investing in Africa through Mauritius had structured their funds using Global Business Companies. However, since the implementation of the Limited Partnerships Act 2011 in Mauritius, increasing numbers of funds have been structured as Limited Liability Partnerships. More than 25 funds structured as Mauritius partnerships are now registered in the jurisdiction.