Old Mutual sees ‘enormous opportunity’ in South Africa

Political reforms and the creation of a new free trade area will prove a boon for the continent’s biggest economy, says Paul Boynton, the CEO of Old Mutual Alternative Investments.

Africa edged a step closer to frictionless trade in July when South Africa became the latest country to signal that it wants to join the African Continental Free Trade Agreement. Nearly 50 countries have signed the initial framework and six have ratified the deal, which takes effect once ratified by parliaments of at least 22 countries.

AfCFTA could help transform the South African economy after a period of stagnant growth, says Paul Boynton, chief executive of Old Mutual Alternative Investments, whose parent company Old Mutual Limited listed on the Johannesburg Stock Exchange in June.

Paul Boynton

How would you describe the investment opportunity in Africa today?
Different parts of Africa are trending positively. In Nigeria, the oil price has recovered. There’s been positive political change in South Africa, Angola and Zimbabwe. The AfCFTA agreement [signed in March] is a further positive development for Africa. South Africa has been through a slow patch but there is evidence of green shoots. Infrastructure is a standout for us at the moment, which is our principle activity in Africa.

What impact will the new free trade area have?
South Africa has just signed. Nigeria has yet to come on board, although we understand that is a matter of time rather than principle. The opportunity for African countries to trade among themselves is enormous. Intra-African trade is about 15 percent compared to within Europe, where cross boarder trade is 40-odd percent. With rising consumption expenditure over the next decade in Africa, there is an enormous growth opportunity across sectors, for example, in manufacturing. For OMAI, it presents significant opportunities in consumer facing business, manufacturing and infrastructure: logistics, roads, rail and ports.

South Africa is a key economy. What is the new government doing to boost growth?
South Africa has been through a period of low growth and uncomfortably achieved procurement activity. Consumer and business confidence has been muted. The previous government was quite profligate in spending and we need to work down the credit card. As a result, it has been a somewhat challenging space to find new investments and manage existing ones.

Looking forward, confidence is lifting. Some key decisions have been made over the past six months by the government of President Cyril Ramaphosa, which position the economy well over the longer term. When the president spoke at the opening of Old Mutual’s new building, he reiterated South Africa’s need to build strong institutions and encourage foreign capital. He has launched an initiative to attract $100 billion into the country to facilitate this.

What do these reforms mean for you?
Now is a very good time to put capital to work in the country. There is some catching up to be done in many portfolio companies. South Africa’s stalled renewable energy programme has been restarted. Since the new president came in, we have signed a number of PTAs [preferential trade agreements], reached financial close on a number of new renewable projects to which we’ve committed several billion Rand. OMAI has invested a significant amount of capital in renewable assets over the past five or six years. Our portfolio is in excess of 2,000 megawatts. We have invested in solar, wind and CSP [concentrated solar power] and also in a small amount of hydro.

Currency and political risk are prevalent in any investment in Africa. How do you manage them?
Africa is highly diverse: 54 countries with 54 different risk environments. We work from the bottom up. We find a project of interest and then look at the jurisdictional risk, the operational, legal and regulatory frameworks. Even though we are local to some extent, for example, in Nigeria, with an office in Lagos staffed by Nigerians, we would ordinarily also look for a local partner to mitigate risk. We would also look for political risk insurance cover on projects.

The dominant risk in many investments is currency, both in terms of the exchange rate and ability to remit. If we invest dollars into a project in Ghana, we want to know, if we can link our revenue line in some way to the dollar or leverage the project in a way to mitigate currency risk.

As an investor in South Africa, where we are investing principally domestic capital into our funds, currency and political risk are elements we don’t look at as a sovereign issue. We do, however, consider the credit risk around any payment guarantee that we may have received.

How easy is it to find African GPs to invest in for your fund of funds business?
The landscape in Africa has diversified over the past few years. There are 200-odd GPs in Africa and more sector-focused or niche funds. The Africa PE ecosystem has matured significantly in recent times having historically struggled to perform over a long period of time compared to the global private equity space, particularly the US. We believe that Africa on a relative basis constitutes an attractive investment proposition in the next five years as global asset prices are pretty challenging and the macro view for Africa has improved.

How do you manage ESG?
Each business unit in OMAI has a fit-for-purpose ESG management system that fully integrates ESG into the investment process. From initial screening to detailed due diligence and to active asset management, we look to ascertain whether it is a suitable business and if changes can be achieved for positive outcomes. We have implemented an ESG framework that allows us to run the ESG management systems, align with United Nations Sustainable Development Goals and measure impact at ground level. We push hard in areas where we can make a difference. We assess a portfolio company both ‘longitudinally’ over time and we also compare it ‘horizontally’ or laterally to its peer group. We aggregate this information both at the fund level and as a manager to determine our impact footprint.

Dean Alborough, head of ESG at OMAI’s African Infrastructure Investment Managers, describes the impact of environmental, social and governance initiatives at Umoya Energy Wind Farm

“By its nature, the Umoya wind farm built in the Western Cape addresses climate change issues. The farm became operational in 2014 and generates 176,600 MWh a year – enough to power 49,000 low income homes – and offsets 183,00 tonnes of carbon emissions annually.
From the beginning we applied a robust ESG risk management process, including due diligence and impact assessments. All renewable energy investments in South Africa must include socioeconomic development and/or enterprise development initiatives. Through the Hopefield Home Improvement Project, we were able to succeed in both.
The local community next to the wind farm identified low income homes that required upgrading through the installation of water geysers, electrics, sinks and new roofs. In phase one of the project, 19 local residents trained on the job alongside outsourced contractors to complete the upgrade of 591 buildings. At the end of the first phase, all 19 had acquired a new skill set and had established three businesses. They alone are now completing phase two of upgrading 351 homes.
Our relationship with the community is paramount. We have a team that communicates with residents and other stakeholders on an ongoing basis. A non-profit community company is a shareholder in Umoya, so it holds a beneficiary interest. To date the feedback from the community has been very positive, but we are not complacent. The relationship is something we continuously strive to better and uphold.”

This article is sponsored by Old Mutual Alternative Investments. It appeared in the Africa Special supplement published with the September 2018 issue of Private Equity International.