Investing in Africa - not a wild card decision

Following the ruling by the Ministry of Finance allowing retirement funds to increase their offshore exposure to 25% with an additional 5% of their assets to be invested in Africa, industry focus has been on the potential potentially large returns from this market. However, trustees should carefully consider both the advantages as well as the risk that they will need to manage when making such an investment.

This is according to Windall Bekker, Head of Investment Consulting at OMAC Actuaries & Consultants who says that many African economies have enormous potential for growth making them attractive investment destinations.

“Growth in these countries is driven by lower levels of debt on both fiscal and consumer levels, a growing middle class population of consumers and increasing investment into education, health and public infrastructure,” he says.

Furthermore, an increasing number of South African and developed market companies are expanding their businesses into the lucrative African markets through green field investments, acquisitions and partnerships. According to Bekker this will open up African markets, improving resource exploitation, which should translate into higher growth and attractive return on investments.

Bekker warns that, for a South African Based investor, investing in Africa means exposure to a multi layer of currencies.

“Therefore, currency risk becomes one of the key factors in determining the suitability of this asset class. Most African currencies however, are relatively stable against both the Rand and the Dollar due to currency management regimes that are applied in most of these countries,” he says.

Another consideration is liquidity. According to Bekker, some African markets are still shallow and under repressive controls, making them very difficult to exit once one has invested. Furthermore, due to the closely-held nature of the businesses in these markets, there is a low level of free-float in some stocks which will make it difficult for investors to have large enough exposure to some preferred stocks

Bekker recommends that, due to liquidity constraints investors should have a private equity mindset when approaching Africa. However he follows to say that liquidity should not be a huge impediment for investors willing to invest in Africa for two main reasons;

1. The maximum that could be invested in Africa is only 5% of the Fund, and this should make liquidity management much easier.

2. Managers managing money in Africa generally play in the upper end of the liquidity spectrum and have already factored liquidity as one of the key factors in their portfolio construction methodologies.

Bekker urges trustees to draw from the experience of managers that have considerable years of managing money in Africa and sufficient capacity in terms of research and physical representation within these economies.

He says that because fees are similar to international funds, which range from 1% to 2% per annum, it is vital to have a manager who adds value to a portfolio rather than just pick up fees on assets that could earn better elsewhere.

“An experienced investment consultant with actual experience in making African investments can be a valuable asset to the fund trustees,” says Bekker.