Pen­sion, rising as­set and com­mod­ity prices sug­gest Africa Rising again

In­sti­tu­tional in­vestors are some of the main driv­ers of the de­vel­op­ment of cap­i­tal mar­kets and sav­ings are the nec­es­sary in­gre­di­ent for the de­vel­op­ment of in­sti­tu­tional in­vestors.

Financial Nigeria Magazine - - Contents -

Africa con­tin­ues to turn global in­vestors’ heads, de­spite its chal­lenges. At­tracted by its many fast-grow­ing economies and bur­geon­ing con­sumer and busi­ness spend­ing – ex­pected to reach US$6.7 tril­lion by 2030 – savvy in­vestors are find­ing op­por­tu­ni­ties on the con­ti­nent.

Where to start when look­ing to in­vest in Africa? First-time in­vestors may be­gin by iden­ti­fy­ing the largest economies by GDP or the largest cities by pop­u­la­tion. While it’s cer­tainly use­ful to ex­plore coun­try- and city-level de­tail, it may be more per­ti­nent to start at a re­gional level by iden­ti­fy­ing groups of coun­tries with sim­i­lar­i­ties. In other words, seg­ment­ing the con­ti­nent into mean­ing­ful mar­kets.

In its lat­est re­search re­port on in­vest­ing in Africa, Bright Africa 2018, in­de­pen­dent in­vest­ment firm RisCura does ex­actly that. It seg­ments Africa into nine mean­ing­ful mar­kets, or re­gions, by analysing cul­tural con­nec­tions, in­ter­con­nec­tiv­ity through trade blocs, sharing of ex­per­tise, good busi­ness re­la­tions, and rel­a­tive ease of trans­porta­tion, among oth­ers.

“As­sess­ing Africa at a re­gional level gives in­vestors a bet­ter un­der­stand­ing of the strengths and weak­nesses of an in­vest­ment des­ti­na­tion by not only analysing the char­ac­ter­is­tics of the coun­try of in­ter­est, but also the sup­port that it re­ceives from its re­gional part­ners,” says Heleen Gous­sard, RisCura’s head of un­listed in­vest­ment ser­vices and prin­ci­pal au­thor of Bright Africa 2018.

In­sti­tu­tional in­vestors

In­sti­tu­tional in­vestors are some of the main driv­ers of the de­vel­op­ment of cap­i­tal mar­kets and sav­ings are the nec­es­sary in­gre­di­ent for the de­vel­op­ment of in­sti­tu­tional in­vestors. As more peo­ple be­come more af­flu­ent, their abil­ity to save will nat­u­rally im­prove. In ad­di­tion, tech­no­log­i­cal in­no­va­tions are en­abling cer­tain African pen­sion funds to bridge the di­vide be­tween the for­mal and in­for­mal em­ploy­ment mar­kets.

Ac­cord­ing to Bright Africa 2018, RisCura cur­rently es­ti­mates pen­sion fund as­sets in Africa to be US$372 bil­lion, up US$40 mil­lion since Bright Africa’s ini­tial re­lease in 2015.

What are the op­por­tu­ni­ties for in­vest­ing this cap­i­tal? In many African coun­tries in­sti­tu­tional as­sets are grow­ing much faster than prod­ucts are be­ing brought to mar­ket. As with pre­vi­ous re­ports, Bright Africa 2018 looks at eq­uity in­vest­ments, both listed and un­listed.

From 2014 to mid-2016, African stock mar­kets failed to grow, largely due to de­creas­ing com­mod­ity prices and a flight to safety from global in­vestors. In 2015 the re­gion saw the low­est recorded growth rate since 1998. The last quar­ter of 2016, how­ever, ush­ered in the start of the African eq­uity re­cov­ery as can be seen from the uptick in in­dex re­turns across the dif­fer­ent re­gions in the Bright Africa 2018 re­search.

Ac­cord­ing to the re­port, Kenya stands out as Africa’s over­all win­ner in terms of listed eq­uity per­for­mance. The coun­try’s rel­a­tive im­mu­nity to the com­mod­ity cy­cle, busi­ness-friendly en­vi­ron­ment and the con­tin­ued in­te­gra­tion of the East African Union, has re­sulted in rel­a­tively high lev­els of in­vestor con­fi­dence when com­pared to other re­gions in the con­ti­nent. These re­turns, how­ever, still only rep­re­sent a com­pounded an­nual re­turn of 10% in US dol­lar terms.

Not sur­pris­ingly, liq­uid­ity and the cost of trad­ing re­main prob­lem­atic when in­vest­ing in African listed eq­ui­ties.

With re­gards to pri­vate eq­uity, Bright Africa 2018 re­ports that the av­er­age pur­chase price of pri­vate com­pa­nies has risen from 4.8x EBITDA (Earn­ings Be­fore In­ter­est Tax De­pre­ci­a­tion and Amor­ti­sa­tion) to 7.3x EBITDA be­tween 2009 and 2017.

Due to this rising trend in pur­chase prices, pri­vate eq­uity funds in Africa are in­creas­ingly in­vest­ing in early-stage businesses in the search for earn­ings growth.

As a large amount of in­vest­ment cap­i­tal has yet to be de­ployed by funds, pur­chase mul­ti­ples could in­crease even fur­ther. Funds may there­fore con­tinue to in­vest in early-stage businesses as they search for earn­ings growth. As­sum­ing the risks re­main con­trolled, this could be a huge boost to African en­trepreneurs who nor­mally find it dif­fi­cult to raise fund­ing for their businesses.

De­spite the above, a num­ber of themes unite the con­ti­nent. The pri­vate eq­uity in­dus­try con­tin­ues to grow, with deal ac­tiv­ity still in­creas­ing and as­set prices re­main­ing ro­bust. The growth of Africa’s pen­sions in­dus­try and the re­sult­ing in­crease in lo­cal cap­i­tal avail­able for in­vest­ment also pro­vide sig­nif­i­cant op­por­tu­nity. With the re­ver­sal in the com­mod­ity cy­cle likely to pro­vide an ad­di­tional boost, it ap­pears that the Africa Rising nar­ra­tive may be alive and well.

Heleen Gous­sard, RisCura’s head of un­listed in­vest­ment ser­vices and prin­ci­pal au­thor of Bright Africa 2018

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