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Don’t forget Africa

Uplifting the economies across the continent indirectly benefits South Africa.

The story of Africa’s growth potential is brought to life by 1.2 billion inhabitants and an urban population estimated to increase by 24 million people annually. Yet many local retirement funds have been slow to allocate to African countries outside of South Africa. But, with listed South African assets no longer offering attractive returns and with a better understanding of how best to implement strategies on the broader continent, there’s a case for retirement funds to reallocate a portion of their traditional South African growth assets to pan-African mandates – a move encouraged by Regulation 28. 

Learning from the past

While few funds have fully embraced the limits allowed by the regulations, a number have tread the path to some degree before. A number of key themes have been evident in cases where investors have struggled to earn the returns they expected. The first is that African frontier stock markets have exhibited elevated volatility, as they are often driven more by the whims of impatient and skittish foreign retail investors than by underlying economic growth. The second arises from private equity investors buying into what they believe is the next African entrepreneur success story, only to find it more challenging to positively affect businesses and to exit investments than in more developed markets. Finally, local economies have found it difficult to weather currency volatility in areas where they are reliant on foreign investment.  Real estate funds, for example, have felt the impact of the limited foreign exchange risk that tenants are able to bear before their ability to trade and meet their rental obligations is hampered.

Latest approaches to Africa

The accumulated experiences of investors in Africa are helping to shape the market such that investors are now better equipped with adapted models, local knowledge and tested expertise to benefit from Africa’s growth than ever before.

Skilled asset managers who have “paid their school fees” over the years and understand the idiosyncrasies of the various listed markets are better positioned to deliver value for investors.  These managers recognise the need to cap the size of their funds to enable them to most effectively capture performance from the limited nature of frontier market stock exchanges. They also manage funds with liquidity limits in place, in order to protect investors from the volatility resulting from significant withdrawals by other investors (historically a big factor in the destruction of value).

Certain markets have developed to the extent that high quality private market assets can be aggregated to a sufficiently diversified degree. Regulators are supporting private market structures which allow more flexibility for local and foreign investors to access assets. Fund managers have innovated to offer flexible regional and pan-African platforms and collaborated with local specialist partners to manage assets in-country. They have also recognised that, for certain asset classes such as real estate, additional income can be gained through various value-adding initiatives rather than purely through greenfield or brownfield development.

Additional benefits of allocating to Africa

Besides the wider opportunity set, geographic diversification and attractive growth narrative, a significant benefit of allocating to Africa is that retirement funds are able to gain an additional 10% US dollar exposure (beyond the 30% which Regulation 28 allows to global assets).

Using the regulatory Africa allowance to reallocate between interest-bearing assets (as opposed to growth assets) is also gaining traction. In particular, African private credit (senior, secured credit) is a good fit for institutional portfolios and it’s not difficult to see why when considering:

· the stability of returns from the regular, contractual cash flows;

·  the fact that loans are self-liquidating through contractual exits (with invested capital typically being repaid from the first year); and

·  protection in the form of security and seniority in repayment order.

African senior secured private credit has consistently delivered 8-10% in US dollar terms, with volatility for South African investors almost entirely a function of the USD/ZAR exchange rate. Including African private credit in a portfolio increases the expected return of the portfolio for a given level of risk, irrespective of the overall target return.

A commitment to Africa

As a constituent of Africa, it is important for us to remember that uplifting the economies across the continent indirectly benefits South Africa, developing the overarching financial ecosystem of which we form part. Investing in Africa enables growth and economic development that is much needed across the continent and, when carefully considered in an investor’s portfolio, can offer strong returns with significant diversification benefits.

Todd Micklethwaite is the head of Distribution at Sanlam Investments Alternatives.

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Investing in Africa is like gambling on the street, things can quickly go wrong. If you win, you still can loose because you have your winnings on the street. Most of people investing in Africa I know, lost badly.

Can I tell you a little secret? Despite all the mumbo jumbo about investments, they don’t really want us there…In actual fact they are quite happy to carry on with 5 cows, a mud house and 10 children.

Yet most of you readers still live there. Makes you think.

South Africa is not like the rest of Africa and its economy is far more developed. Secondly “most of the readers” can make investments anywhere in the world if they want.

Okay, so why do you lot moan the whole time?

Quite funny this how everyone ignores African reality. Many investors from great white hunters, one CJ Rhodes, Oppenheimers, Gordons, Rautenbachs and Ruperts plus a horde of French, English, Australians, Israelis, Chinese and Indians have made good money in Africa.

But, aside from a relatively brief interlude of colonial rule, they have all understood, and understand now, that rules in Africa are flexible and different to the “first” world. In Africa, pay the bloated Big Men what is needed and do whatever you like, until there is a change over to the next feeding group. Then you must be nimble or gone. There is no long term consistency or certainty in Africa; look at SA. So money needs to be made quickly and without scruples. There are no blue chips in Africa; even SA – I direct you to Steinhoff, Tongaat etc.

Of course this only suits a certain type of personality (maybe amoral and unprincipaled?) and probably that is what needs evaluating most.

Of course, a great business opportunity in Africa is the arms trade but I think the Russians may have already cornered that market.

“The accumulated experiences of investors in Africa are helping to shape the market such that investors are now better equipped with adapted models, local knowledge and tested expertise to benefit from Africa’s growth than ever before.” Perhaps this could be paraphrased as “this time it’s different?”

We are constantly told by fund managers that past performance does not guarantee future returns so instead of this Sanlam plug with the implied guilt that “As a constituent of Africa, it is important for us to remember that uplifting the economies across the continent indirectly benefits South Africa, developing the overarching financial ecosystem of which we form part.”… I would prefer Mr Micklethwaite to provide some performance data of their Africa investments.

We all want to get in on the first step on the ladder but are tired of constantly breaking our legs when the second step on it collapses.

Africa is too big to be forgotten. Want proof?

“ALL CONTINENTS PUT TOGETHER WILL FIT INTO AFRICA”

Quote: Pres Jacob Zuma speaking at a business dinner on 9 Dec.2015.

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