Why hedge funds should not neglect Africa

Wed Sep 11, 2013

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No longer a simple resource play, the once-dark continent is fast becoming a destination for private and public investment.


By Ashley Bendell

I first started regularly visiting Nigeria and Kenya in 2007 as hot money flowed into Sub-Saharan Africa equity and debt instruments in spite of the fact that many investors found it challenging to place the countries making up this region on a map. The stock markets of these nations, like many others scattered around the continent, had been – and to a great extent still are – ignored by investors, largely due to liquidity issues or market cap constraints. But over the past five years we have seen a slew of mutual and hedge fund launches focused on Africa.

The spotlight now shines on Africa, and many compare what is happening there today to India in the early 1990's and China in the early 1980's. The corporate and private equity world is also waking up to the opportunity as the likes of McKinsey & Co., General Electric, and The Carlyle Group build out their infrastructure.

In what other countries could you hope to see such rapid collective growth? Sub-Saharan Africa has grown consistently above 5% for the past decade, and the future continues to look promising with the IMF anticipating 5.9% growth – double the global rate – in 2014. This growth goes hand in hand with other positive trends, such as the continent's demographic dividend (a very young population, and falling dependency ratios), an expanding middle class, more democratic elections, low government debt levels, as well as a vast and increasing commodity pool.

The African stock markets are outperforming those in the rest of the world. Many have returned more than 50% in the past 18 months, including those in Nigeria, Kenya, and Ghana (Egypt often falls within Middle Eastern and North African mandates and therefore is outside of this discussion). South Africa returned 25%. All stand out relative to the MSCI EM index which has remained flat.

Where could you expect to see a 75% return in 18 months? That is exactly what is happening in Nigeria, Africa's largest country (population: 160 million). Nigeria is the home of Aliko Dangote's Pan African cement company, which is worth $20 Billion and is expected to list in London in the not too distant future. The Nigerian stock exchange also contains numerous multibillion-dollar companies within the banking and consumer sectors, including such multinationals as Diageo, Heineken, and Nestle. A number of banks also have GDR listings. There are approximately fifteen Sub-Saharan stock-markets; these are dominated by the market capitalization of South Africa, Nigeria, Kenya, Ghana, Ivory Coast and Zimbabwe.

The Sub-Saharan stock markets are increasingly accessible. While trading volumes remain lower than in many larger emerging markets, they are dominated by foreign institutional investors split relatively evenly among U.S., European, and African-based mutual and hedge fund managers. Local investment banks and brokers (as well as their international partners/ bulge bracket banks) provide trading access and international corporate road shows. African ETF’s have also been launched by the likes of Van Eck.

Liquidity remains a key constraint for many managers, but there are many ways to get involved. Many of the world's largest companies now have material exposure to Africa, including major consumer and beer brands such as PZ Cussons or Heineken. In addition, South Africa's Johannesburg Stock Exchange is the home of Massmart Holdings, a leading retailer, which Wal-mart Stores purchased 51% of in 2011 to expand into the continent.

Many other more liquid South African companies offer growing exposure to the continent within the construction, consumer, financial services and telecommunications sectors. These include MTN (mobile telecommunications), Tiger Brands (a leader in food), and Shoprite (the continent's largest supermarket). Investors can also invest via the stock markets of the UK, U.S., Australia, Canada, and Portugal, many of which also offer exposure to the new wave of oil and gas discoveries in Uganda, Tanzania, Kenya and Ghana. And, of course, Africa has a wealth of natural resources in Ghana (gold), South Africa (gold, platinum), Mozambique (coal, gas), Ethiopia (fertilizer, coffee), Zambia (copper), Ivory Coast (rubber, palm oil), Guinea/ Sierra Leone (iron ore), and Botswana (diamonds).

Along with public equity development, Africa has also seen growth in its fixed income and private equity markets. Recent Eurobond issues in Nigeria, Rwanda, Zambia and Ghana have been oversubscribed, and priced at 5% to 8%. Local debt instruments have also provided yields of greater than 20% in the past two to three years while many currencies have remained relatively stable.

From a private equity perspective, Carlyle and KKR have recently entered the space and other significant Pan African and local private equity funds offer access to key sectors. There is also increased interest from family offices and those who in the past have been advocates of aid to Africa, but are now realizing they can have a greater impact through investment. Take Bob Geldof who created Live Aid and just launched 8 mile, and President Obama, who recently launched his African infrastructure plans under Power Africa following his week-long trip to the continent.

For those ready to start investing, there is a great support network for better understanding and executing upon these opportunities, including an increasing number of investment banks both foreign and local. In addition to their research, the banks are hosting numerous corporate road shows to the U.S. and Europe in addition to organizing their annual trips and events on the continent. Corporate investor relations has improved significantly at the largest companies often in partnership with outside advisors. Africa is becoming more of an open book with daily coverage by Reuters and Bloomberg as well as other major media outlets, including CNBC Africa. African presidents can be followed on Twitter. There are also a variety of major African trade and investment forums in the U.S., and leading American universities and business schools are bringing together senior corporate and thought leaders from the continent to our home soil.

Each country in Africa has its own specific risks and rewards, which are slowly becoming more transparent, and it is essential that political and economic reforms continue. These early days provide a unique chance to uncover great opportunities. If investors are willing to roll up their sleeves and leverage a unique and developing local network, there are many opportunities to earn satisfying returns and build long-term relationships within this fledgling and fascinating community.

Ashley Bendell is a New York-based equity strategist focused on Africa. He was formerly the head of Africa equity distribution at Renaissance Capital and of frontier equities at Exotix in the USA. He started his career at Credit Suisse in London.

ISSN: 2151-1845 / CDC10004H

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