Burgeoning middle class fuels growth in Africa’s banking sector

For a portfolio manager, preparing for a major ‘Investor Day’, where his objective is to lure predominantly US clients into his Africa funds, Sofiane Lahmar is unusually circumspect. He refuses to hype the opportunities which abound in the vast, resource-rich African continent he loves so much, preferring to reflect initially on the challenges of investing there.

“It’s a mixed picture these days,” says Mr Lahmar, an urbane Algerian, who studied in both Boston and Paris and worked for investment houses in Africa, the Saudi Royal Family and JP Morgan in New York, before joining Development Partners International in London in 2010. “Natural resource exporters like Algeria, Nigeria and Angola have suffered over the last 18 months, due to a drop in oil and other commodity prices.

“They now have a big hole in their budgets and their ability to fund public spending will be limited, so we will see cost cutting and a lower level of foreign reserves.”

That said, Mr Lahmar notes solid growth in the Moroccan economy of between 4 and 5 per cent in 2017 and 7 per cent in Côte d’Ivoire and he is continuing to identify attractive companies for private equity investment. The $725m he raised for his ADP II fund in 2015 is now 60 per cent invested and he will be looking for closer to $1bn in the next incarnation in 2018.

“There is more appetite and interest among institutional investors for Africa – notwithstanding the many challenges – as other emerging markets have suffered,” reflects Mr Lahmar. “It is generally regarded as less of a frontier market than previously, now that there is more track record from funds in this space.”

Recent deals he has been involved in include a $100m investment in Côte d’Ivoire’s Banque Atlantique, also active in another eight countries across the region, part of “the largest private equity transaction in Francophone west Africa”.

He describes a mounting sense of “stability, growth and momentum” in the country, reaping the benefit of demographics and an economy diversified across telecoms, financial services, commodities and agro-processing, after a 10 year period of political strife.

Particularly attractive for investors such as DPI is the location of Côte d’Ivoire and its companies within an eight-country economic zone using the CFA franc currency, pegged to the euro. “They are effectively part of the eurozone,” suggests Mr Lahmar.

“First we identified banking as one of the biggest growth industries in Africa,” he says, sharing some of the thinking behind his investment process. Key to this is analysis is focusing on industries which will benefit from Africa’s fast-emerging middle class.

“Then we looked at financial services and banking across a number of African regions.”

DPI also invested in Nigerian insurance company Mansard Insurance, which they sold on to the world’s leading insurer, Axa.

“In general, we prefer a regional strategy,” says Mr Lahmar. “If we are buying companies that work on a pan-African scale, there is diversification of risk. Even if we are in a bigger economy like South Africa, where you may have a single country firm, after we invest, we push them hard to become multi-country businesses.”

Another such example, very focused on the emerging middle class, is HomeChoice, a “non-food retail” company in South Africa, using materials sourced and imported from Asia, with consumer sales conducted through catalogues.

“They have a huge sales and marketing machine, but very few stores, outside a couple of big showrooms, with 90 per cent of their sales via credit,” he says. “This means they are very good at extending and managing credit risk.”

Under DPI’s influence, HomeChoice is starting to expand regionally, shipping goods to Namibia and Botswana. “With our help, they are looking to build a stronger presence outside South Africa, including in Botswana, Namibia, Zambia, Swaziland, and potentially east Africa.”

He is particularly proud of his fund’s $45m minority stake in Morocco’s private Université Privee de Marrakech (UPM), also looking to expand across Africa’s Francophone region. The higher education institution recently gained Moroccan government accreditation, which puts it on a par with state-run institutions, in terms of qualifications, giving graduates the ability to apply for public sector jobs. “This credibility among employers should lead to much stronger growth,” predicts Mr Lahmar.

Having lived through the frightening years of the Algerian civil war during the 1990s, he was used to uncertainty. But when he started to visit neighbouring African countries such as Morocco, he began to see how ideas from one market could be leveraged in another.

“Culturally, I could see that Morocco and Algeria were very similar,” he remembers. “But what I immediately liked about Morocco was the more diversified economy, including agriculture and services, compared to Algeria’s over-reliance on natural resources. From my early days in this business, I could see Morocco was going to do well, through reforming and promoting the financial sector. Now Moroccan banks are able to expand in sub-Saharan Africa, with a very sophisticated strategy, second only to South Africa.”

Identifying these trends and the companies accompanying them, helped fuel his passion for investing in the continent. “I want to help local entrepreneurs become African champions,” he says. “It is impossible to have that sort of impact in the US or Europe, where private equity is just about financial engineering.”