New Firstrand unit offers Africa growth exposure
Ashburton says resources are not the only game in town
THE FirstRand group’s Cerberus of financial services — First National Bank, Rand Merchant Bank and WesBank — has grown a fourth head in the hopes of grabbing investor cash that might have escaped into the pockets of other asset managers. Although starting afresh in this market is a major challenge, Ashburton Investments has FirstRand’s combined might behind it, as well as a few compelling advantages.
Ashburton’s major differentiator is debt funds, where it is offering investors the chance to participate in returns on the FirstRand group’s loan book across Africa. By volume, FirstRand is the leading lender in Africa, having this year disbursed more than $907-million (about R9-billion) to July 2013 across more than 25 countries. Its presence on the ground and local knowledge are proving a handy tool for investors keen to get involved in the African growth story.
Boshoff Grobler, head of Ashburton, said the funding shortfall for infrastructure projects across the continent provided an opportunity for investor returns off the back of the due diligence the bank had performed.
“European investors want our advice because we are entrenched in the African market. We had to bust some myths about what’s really growing in Africa — it’s not all about resources. Demographics, urbanisation and a rising consumer sector has led to growth in consumer goods. We unpacked where the real value lies and not all the growth will come from listed companies. Private equity offers access to that growth.”
According to Grobler, safety is provided not by third-party insurance — the bank is the counterparty, so there are no extra costs in the finance arrangement — but by FirstRand doing its homework.
“Banks are prepared to take lower returns as long as the return flow of cash is secure. We insist on proper reporting-back to the bank — that’s the first priority, not an elevated level of returns. We also hedge constantly to reduce the default risk. Typically, these debt funds will have Libor plus 4.5% to 5.5% as a targeted return.”
Grobler expects private equity activity in Africa to increase. “Access to that packaged debt will pay off for investors too. We already have a South African debt fund in the market and we’ll be launching an Africa debt fund soon, focusing on sub-Saharan African loans. These are products that were typically only available to banks or financial institutions before.
“You need more than equity and bonds, so credit and private equity become very useful in this space. We draw all these components together, alongside the banking franchises but separate. We can’t be a new player in the market and offer what everyone else is offering. What we sell we remain invested in — it’s the integrity ethos,” said Grobler.
He does not think African growth prospects will be severely dented by the tapering of quantitative easing.
“That process will only happen to the extent to which the US economy picks up the required growth momentum without needing the extra liquidity. People are concerned that the wash of liquidity will go away and lead to a reversal of cash from emerging markets, but our view is that growth in the US will mean the cash comes back. There are structural reasons that cash came to emerging markets in the first place, so we don’t expect it will go away.”
Investor feedback during Ashburton’s prelaunch roadshows has been positive. “There are some good foreign-based Africa funds, but they rely on the information they get from data feeds and company visits. We have access to FirstRand’s footprint in Africa and their loan-making book, and it knows all the companies intimately. That knowledge is our differentiator in a competitive market and investors tell us so.”
Ashburton’s rule for debt funds is co-investment. So with every credit deal concluded, a minimum of 7.5% of its value must be offered to the debt funds and the rest kept on the bank’s balance sheet. The bank is prohibited from selling that debt to a level below the holding in the debt funds — it must hold at least an equal value of that debt on its balance sheet. “The bank can’t walk away from the debt.”
Another interesting option for investors is Ashburton’s sub-Saharan property development fund, RMB Westport.
“A year ago, we launched this property development fund that is building retail, commercial and office space in West Africa. We raised $250-million, including $50million of the group’s money. The supply and demand for A-grade space is seriously mismatched in this region and this fund is addressing that. Many offshore and local investors have come on board so far. They like the tangible, real asset that infrastructure represents,” said Grobler.
Raising cash for economies of scale and an instant presence has not been a problem for Ashburton. At its launch, the unit’s assets topped R114-billion, originating through the FirstRand group and what was put up by investors. Ashburton is also offering the usual array of multi-asset funds, passive trackers, risk-managed products, growth funds, yield enhancers and bespoke blended products.