The last panel session of Thursday's FundForum Africa in London tackled the fascinating question of Myth versus Reality: How Should Investors Assess The Investment Potential Of The African Story?
Moderator Albert Reiter, CEO at e-fundresearch.com & investRFP.com, perhaps summed up the key theme of the session when he said: The African Investment story as such doesn't exist.
In other words, there are a lot of very specific investment stories in Africa.
For instance, Simon Kitchen of EFG Germes Holdings explained how, whilst there were some common themes in the continent: demographics, rising per capital incomes, mineral endowment, statistics on education, these were no guarantee of returns. Instead, he said, investors had to focus on trends that were sustainable, explaining by way of a cautionary tale:
"My bias is in North Africa," he explained. "And we had two economies, Morocco and Egypt. In the last decade Egypt was streets ahead, doing all the right things. Morocco was OK but expensive. Egypt was getting returns, but that ran into a wall. A lot of the things that the Egyptian authorities were doing were unsustainable. Meanwhile, Morocco was quietly improving, keeping inflation under control, diversifying industries. Egypt is the country where people have been very badly burnt. Morocco macro now looks a lot more interesting."
That said; it was hard to find good investment opportunities, he said.
Onshore investors
Meanwhile, Olusegun Omoniwa, from Standard Chartered, explained how the allocation priorities of African investors were different depending on where they were based:
"There tends to be a desire for yield, a desire to escape the currencies," he explained.
"This is more true in west Africa than east Africa. West African looks more outwards, East more inward, southern Africa they look at South Africa. To sum up, there's a heavy skew towards steady, stable, yielding returns. We have a joke in our team – if it's not paying our clients dividends every month they're not going to buy it."
Is it worth it?
Is it worth looking at all these different circumstances, and all this different research, for an allocation of three per cent of a portfolio, or better to focus on other regions? asked the moderator.
A resounding no, came the response from FIS Group's Adam Choppin. "Big pension fund clients have to be able to write a 500 million dollar ticket to one manager to make it worth their time to do the job. Your risk bucket has to be two billion dollars. Where are you going to deploy two billion dollars in African equity? You're going to own the market. For the big clients it's simply not worth their time. It's an issue of scale. When African markets get to scale the big institutions will get in as well," he stated.
The realities of Africa
There were some really good companies to invest in, albeit few and far between, argued Roberto Kampl, Portfolio Manager at Alquity.
"When you look at the African continent and you look at the spectrum of quality of government and strength of institutions, there are very few that fall in that list of well-managed with strong institutions," he said.
"The best-managed companies are in South Africa, they have a clear understanding of the strategy. Several have an African strategy and are partnering up with the right people. They have the right level of integrity. We just try and focus on companies that have a strong clear focus and strategy and you can find them across Africa. The key thing is the depth of the market."
Helping deepen this market was something that pensions funds could have a role in contributing to, added Olusegun:
"There is so much more room for the pension fund industry to grow and so much in deployable assets they would have to help deepen and develop these markets, that's a reality we're quite keen on seeing."
The positive stories
Of the positive stories within the continent, the panel cited Morocco, which has large savings institutions that allocate quite efficiently, according to Simon. Egypt will go through a positive cycle as they get investment, similarly South Africa will go through a cycle as the reign of Zuma comes to an end and things get better, added Roberto. The Ivory Coast has come through a difficult period; they've turned the corner, but only until the next election cycle comes along, said Olusegun. Ghana seem to be on track but there is an election there too in December.
"It speaks to the fact that you have to have longer staying power when you're looking at the different stories within Africa," concluded Olusegun. "You have to see clearly what the trends are – cyclical or secular – and you stick with certain trends and maybe just ignore as much as possible the policy makers, hoping they get themselves out of the way and just go with the story."
"There are massive amounts of pessimism on investing in Africa," summed up Roberto. "I'd say that that the likelihood of seeing an increase in value is greater than a decrease in value over the next 12 months because valuations across the whole region are quite low.
"In Africa if you can purge some of the bad actors on the government side, that renewed optimism could result in further capital allocation and perhaps even unlock some of the PE deals that are just waiting to be funded."