Long-term mindset needed to get the most out of Africa

Looking at the numbers of family offices, lawyers and pension schemes attending the recent FT African Infrastructure summit in London, there appears to be a hunger for returns from the latest hot emerging market. But investing beyond this final frontier is not for the fainthearted.

“For renewable and infrastructure projects there is no free lunch,” says Cyrille Arnould, head of the Global Energy Efficiency and Renewable Energy Fund, a fund of funds project operating in emerging markets on behalf of the European Investment Bank and a panellist at the event. 

“There are many opportunities, but nobody will find them to invest on day one. Infrastructure development is a long-term game and to make the highest return you need deep roots in those markets. This is not for the lazy.”

African countries need to take an example from Chile in Latin America when packaging investment opportunities, believes Nancy Riviera, head of structured finance at the Overseas Private Investment Corporation, speaking at the same event. 

“Twenty years ago, Chile was a very small market, but launched ground-breaking pension reform, as they had to find a way to finance infrastructure needs to jump-start the economy,” says Ms Riviera. “It quickly jump-started from a low growth, deleveraged to a high leveraged economy. Suddenly, all the main funds had regulations and laws, and they needed safe projects in which to invest. Now many countries are trying to unleash these pension funds.”

The mistake many funds make is they focus on equity, she says. “Equity gets wiped out. They are looking for high returns and are weary of debt, but debt is much safer and always gets repaid. Investors need to challenge that assumption.”

Speaking on the sidelines of the FT event, Ousmène Mandeng, head of research and development at New Sparta Asset Management mixes easily with both clients and government ministers. He is relaxed about the opportunities, as he knows there is no shortage of them on the African continent.

Mr Mandeng highlights the telco business, which has doubled in size over the last decade. “This is a brilliant example of how well African infrastructure has done. Everybody says the telco business is difficult, but why should it be? Africa is the leader in mobile banking but a debate around electricity is needed. We have an excellent mobile phone network, so let’s adapt electricity supply to achieve some success in Africa,” he says.

Providing a reliable stream of electricity is the biggest challenge for most African citizens, businesses and investors. “Africa is consuming electricity as if it is much poorer; the consumption is around one third of what it should be,” laments Mr Mandeng. “Look at a satellite image of the continent and you will see the lights are dimmed.”

A reliable electricity system would transform the continent’s investment prospects: “You take electricity for granted if you are setting up a business in London, where financing is the only concern,” he says, recalling a recent meeting with the Ministry of Finance in Abuja, Nigeria. 

“The lights went out and everyone just kept on talking, there was not even a comment. Everybody was behaving as if this was a perfectly normal occurrence. But electricity is the biggest constraint to sustained development in Africa and a drag on economic activity. If you generate power through your own facilities, then the prices you pay are multiples of the grid.” 

Consequently, one of the first projects which New Sparta is backing is a major biomass plant in Ghana, powered by wood from a forest of recently planted Brazilian eucalyptus trees, creating 1,200 local jobs. The plan is to later launch similar projects in Nigeria, Cameroon and other west African countries that share Ghana’s climatic conditions.

“We can create a green belt across Africa, to combat the spreading of the Sahara, which poses a real threat,” he says.

This connection to power-generating infrastructure is like a metaphor for Mr Mandeng’s desire to end Africa’s economic isolation from trade agreements and its reliance on cheap labour. “We need to connect Africa to the manufacturing base of the world,” he says. 

Investing in pan-African companies is another approach suggested by investment firms, so that their clients have access to more diversified portfolios of assets. 

“Pan-African investors want a diversified portfolio, investing in key industries and key regions across Africa,” suggests Sofiane Lahmar, a partner at African private equity firm DPI, which manages $1.1bn and has successfully closed two oversubscribed pan-Africa funds.

“This is one of the best ways to manage and mitigate risk, especially currency risk, as a lot of the currencies are not correlated.”

DPI’s methodical approach involves splitting Africa into four separate sub-regions – north Africa, west and central Africa, southern Africa and east Africa – with an “economic powerhouse” country selected for each bloc as a point of entry to regional companies, striving for pan-African status. For north Africa, Morocco, Algeria and Egypt all hold claims to powerhouse status, Nigeria is the key to west Africa, Democratic Republic of the Congo for the central region and South Africa stands out for the south.

Among companies in the latter country, Mr Lahmar has selected home shopping company Home Choice, selling Asian-made home furnishings to customers via catalogue and internet, mainly on credit. But due to problems with the current political transition, South Africa has become more challenging than previously and DPI has become more selective in its investment scope, focusing closely on attractive valuations to compensate for economic obstacles.

Outside of South Africa, Morocco has the most sophisticated financial services players, which are expanding into sub-Saharan Francophone Africa, with firms involved in telecommunications, construction and real estate also making the running.

Typical of favoured companies with a pan-regional expansion plan is leading Moroccan educational institution Universiteé Privée de Marrakech, now also operating in Senegal, Côte d’Ivoire, the DRC and potentially moving into Angola. This fits into DPI’s philosophy of investing in “fundamentally healthy, blue-chip companies across Africa”, helping them expand and grow as opposed to “turnaround” situations. DPI’s private equity fund also has capacity to invest up to 20 per cent of value into listed assets, which helps the firm exploit financial services companies.

Investments in this sector include Nigeria’s leading insurance company Mansard, which sold a majority stake to France’s Axa in 2014. “Nigeria has one of the highest growing insurance sectors in Africa, as the penetration of insurance is so low there,” says Mr Lahmar, compared to South Africa where high profile firms such as Old Mutual and Sanlam provide up to 10 per cent of the country’s GDP.

Also highlighted by DPI are Ghanaian private sector bank CAL Bank and Botswana-listed consumer finance company Letshego, now operating in Mozambique, Kenya, Uganda, Tanzania and Rwanda and starting to reach into Nigeria and Zambia.

Financial services is a key sector suited to expanding pan-regional players, dependent on the continent’s emerging middle class, as are fast-moving consumer goods (FMCG), traditional retail and healthcare, explains Mr Lahmar. He also keeps a keen eye on trends relating to hospitals, clinics, radiology centres and pharmaceutical supply, playing to the strengths of firms such as Biopharm, about to list on the Algerian stock exchange.

This hub-based approach to African investment is also favoured by Man Capital, the investment arm of Egypt’s Mansour Group, making direct investments into small and mid-market companies. 

“What’s happening in Africa, in terms of the demographic shift, fits well with our strategies,” says Hisham Halbouny, Africa expert and managing director at Man Capital, expecting the African middle class to hit 250m by 2030.

Nigeria is currently the market foremost in his mind. “The opportunity is great there, with 180m people. Nigeria is buzzing, with people shopping, riding busses and generally moving around,” enthuses Mr Halbouny. “It has a vibrant, but unstructured and fragmented economy, which creates opportunities for investment. These are long-term; it is difficult for those looking at a three to five-year cycle to source opportunities.”

The three “under-penetrated” industrial sectors targeted by Man Capital are food and beverages, healthcare and education, all of which could benefit from longer-term “megatrends”. Major investments from multinationals such as Coca Cola, which has completed a $240m acquisition in Nigeria, and L’Oréal, which is moving into Kenya, have also helped drive interest.

Mr Halbouny is particularly interested in the quality service restaurants sector, undercutting highly priced foreign brands such as KFC and providing a superior dining experience. “Product design, local taste and mindset play a major role,” he says. “You get something you like, catering to your taste and at a cheaper price point, so it’s a no-brainer.”

Growth in Africa will outstrip growth elsewhere in the world, he believes, as do rival groups. “From an economic and growth standpoint, Africa is where Asia was 10 to 20 years ago, going down the path of liberalisation, integration into the world economy and urbanisation, which were driving economic growth in Asia,” says DPI’s Mr Lahmar. 

“We are now seeing the same trends in Africa, which is catching up with that story. It is not easy to raise money, as this is still a niche area, but Africa is now on the investment map.”