Peter Elam Håkansson, chairman of East Capital, which launched a frontier fund in mid-December, believes investors would benefit more if Africa was part of a wider strategy. “Africa will account for 30% of our fund and our view is that by grouping countries together you have greater diversification across currencies and economies. Our main investments are in Nigeria but we also have holdings in smaller markets such as Tanzania, Morocco and Tunisia. As for sectors, we believe consumer goods, telecoms and financial services are attractive because of the development of the middle classes.”
Other investors are opting for the private equity route to capitalise on the continent’s growths story. Its share of the global fundraising pie has risen sharply this year to 10.8% from 3% on the back of fundraising successes from international giants. Carlyle, Amethis and Helios, which together raised 65% of the $2.2bn total in the first half. Last year, it captured $1.2bn of funds.
“One of the main problems with the public equity markets is that they are concentrated in financials stocks such as banks and insurance companies,” says Ord. “Private equity enables investors to diversify and gain exposure to the consumer goods and manufacturing sectors where many companies are not listed. Also there are big opportunities in infrastructure such as the building of shopping malls, toll roads and power. For example, Nigeria only produces one tenth of the electricity of South Africa but has three times the population. Energy shortages across the continent are common and they need money from the private sector to build power generation in order to continue to diversify the economy.”
Bailey-Smith also believes that investors can gain exposure to the region’s infrastructure needs through hard currency sovereign debt. According to Standard Bank’s figures, governments have issued $10.6bn this year, up from $9.7bn in sovereign debt issuance during 2013.
“All of the sovereign bonds are going into infrastructure and there is no shortage of projects. This is because most of the African and frontier markets are pre-industrial and do not have the power or infrastructure to compete internationally.”
Scheepe also notes that hard currency bonds are less volatile than equities and the risk/return rewards are better over the longer term.
For example, Ethiopia which recently made the news with its $1bn, 10 year bond, is using the proceeds to fund electricity, railway and sugar-industry projects. The bond was priced to yield 6.6% which may be at the lower end of the 6.625% to 6.75% guidance, but still much higher than US Treasuries or eurobonds.
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