Africa’s GDP grew by an impressive 57% on a purchasing power parity basis between 2005 and 2012, slightly ahead of Brazil and Russia at approximately 50%, but behind the doubling achieved by China and India over the same period, according to ‘Bright Africa’, a report from RisCrura, an investment consultancy with a specialism in the region. By contrast, the US and Japan grew around 20%. More importantly for investors, sub-Saharan Africa is achieving a level of political and economic stability that is unprecedented in the post-colonial period.
“Africa’s image has come a long way since its portrayal as the ‘Hopeless Continent’ by the Economist in 2000,” says Rory Ord, head of RisCura Fundamentals, the consultancy’s unlisted investments arm. “Thirteen years later, the Economist labelled the continent ‘Aspiring Africa’, as the many benefits of more stable societies and booming resource prices have led to rapid growth and improving living standards. For most global investors, Africa as an investment destination is a relatively new concept.”
Growth off the back of a young and growing population of one billion, comparable to those of China and India, does give rise to a new class of consumers generating the demand that supports whole sectors. Given the structure of Africa’s investment markets today, is public or private equity better placed to gain exposure to this new phenomenon?
Africa is home to 24 stock exchanges, four of which – those in South Africa, Mauritius, Egypt and Morocco – are listed with the World Federation of Exchanges (WFE). But, as Ord points out, the quality varies dramatically, with South Africa far ahead in all criteria, and Egypt in clear second place based on listings and volumes. Mauritius, Nigeria, Kenya and Tunisia have reasonable activity on their exchanges, but the remaining exchanges have low numbers of listings and trade volumes.
Getting exposed to that overwhelming African consumer-demand story through listed markets is difficult. Nigeria, for many one of the most attractive investment destinations in terms of GDP growth and population, has no listed supermarkets, for example. Moreover, accessing pan-African companies in this sector is also tricky. “Shoprite is listed in South Africa but only 15% of its revenues comes from outside South Africa,” observes Sebastian Kahlfeld, portfolio manager of the DWS Invest Africa fund. Botswana’s supermarket chain, Sefalana, may look an attractive investment, but its stock has a daily trading volume of only £7,000 (€8,498).
Given these issues, what has driven firms like DWS and Insparo Asset Management to launch dedicated Africa-listed equity funds?
Kahlfeld not only points to the signs of improvement in these economies – from the evolution in Nigerian banks since the financial crisis of 2008 to the orderly 2013 elections in Kenya eight years after a previous vote sparked serious violence.
“These developments have not necessarily been reflected in the equity markets as a whole, and that was the reason for launching the fund,” he adds.
Insparo launched its multi-strategy fund aimed at Africa and the Middle East in 2008 and, more recently, an Africa-only equity fund tapping into what they see as increased institutional interest – both international and domestic.
“In Nigeria, for example, the role of pension funds is getting bigger and they have been mandated to invest in equities,” says fund manager Lucas Wurfbain. “This kind of development, combined with the growth of the middle class, means that we are at the beginning of a major macro-economic shift.”
Insparo’s fund invests only in blue chips where there is strong operational and corporate governance. “There have been improvements in accounting standards and the rules for listing and some African companies are thinking of listing on foreign exchanges such as London,” he says.
Shareholders are also taking a more active approach towards corporate governance and that can have repercussions for both domestic and international companies. As Wurfbain explains, large multinationals with local joint ventures in what they now find are their highest-growth markets are buying back minority stakes. Wurfbain cites GlaxoSmithKline Nigeria, which allegedly attempted to bully minority shareholders into selling their stakes at unattractive prices. “The minority shareholders rallied together with a cohesive strategy of shareholder activism, which gave them much improved terms,” he says.
While these listed equity funds may be attractive investments in their own right, they do not give a large exposure to the consumer growth story. The largest and most liquid stocks in most African markets tend to be banks. Yet the consumer growth theme is very powerful and looks to be a sustainable phenomenon. The inevitable result is price appreciation in consumer-sensitive stocks such as the big brewers and multinational staples companies and, indeed, Wurfbain is underweight consumer stocks, as he believes the valuations are too high. “The consumer growth story is already seen in the price of listed stocks,” he says.
Can private equity fill the gap? The importance of private equity as a route to Africa can be seen in the fact that the Carlyle Group is just closing a $700m (€507m) dedicated sub-Saharan Africa fund, having already undertaken a couple of investments in Africa. The first was in a Tanzanian commodities company, while the second was partnering with Investec Asset Management in a Mozambique-based transport company. The lack of rail infrastructure in the country means that commodity exports have to be trucked to the port of Beira for export.
Ord certainly argues that private equity needs to be considered alongside any investment in listed markets. “The value of private equity deals in Africa is weighted towards consumer discretionary, industrials and materials, which make up three-quarters of deal value and two-thirds by number in our Bright Africa report data set,” he says.
However, not all countries are equal when it comes to private equity capital investment. Private equity is fairly well developed in South Africa and in certain parts of North Africa, but it is just beginning in many parts of the continent. More than half of Africa’s private equity activity still takes place in South Africa where the private equity ecosystem of dealmakers, bankers, lawyers and accountants is well established. Strong growth in West Africa, and the large emerging population of Nigeria in particular, has attracted capital and seen many deals, with some high-profile successes (and failures); and the stable governance and resource wealth of Ghana has also attracted investment.
Egypt prior to the Arab Spring had large investment as the economy developed, which has extended into Sudan as a natural extension for trade along the course of the Nile. The Francophone North African countries have fairly well-developed private equity markets and have seen reasonable levels of deal activity. By contrast, Ord finds that in East Africa, private equity investment has been taking place at fairly low levels given the importance of the region on the continent. “However, an increased focus is expected with the formation of the East African Venture Capital and Private Equity Association in early 2013 as an important indicator,” he says.
In reality, it makes little sense to focus exclusively on either listed or private-equity investment in Africa, since the distinctions between the two can be blurred. Firms with a strong Africa presence are already well positioned to understand the political and economic backdrop to investment opportunities. If investors can be persuaded to drop the rigid distinctions between listed and private equity in a region that are now showing immense promise, there may be opportunities for Africa specialists to offer strategies seeking out exceptional value in companies across the region capitalising on the consumer growth theme, irrespective of their status.