Waiting for the dust to settle

If Sub-Saharan Africa escaped the full initial force of the global financial crisis, it is certainly feeling the aftershocks. African banks aren't holding toxic assets, but they are suffering from reduced liquidity. Domestic consumer demand in many of the region's economies is still intact, but slowing demand in export markets is causing pain. And commodity prices, which have underpinned many Sub-Saharan economies, have dropped off.

For those taking a pan-African investment view, however, the region still offers a compelling investment case. “There has been a substantial fall in public valuations in both East and West Africa, particularly in the resources sector, real estate and banking in Nigeria,” says Rod Evison, managing director at UK government-owned fund of funds CDC Group.

As the long-time emerging markets investor's head of Africa and Latin America, Evison is well placed to give a global take on African investment prospects. “When you look at the fundamentals of these sectors, current prices have departed from the fundamental value and there will be some good opportunities in the longer term,” he says.

This is, however, a long-term view. “As far as sectors are concerned, I think one has to look not at the next two months, but at the next two years,” says Evison.

The undervalued financial services sector is firmly on the radar of Peter Schmid, a partner at emerging markets private equity firm Actis. He heads up the firm's African investment team and sees a sector ripe for investment. “When you look at the valuations currently in the financial services sector, there are some world-class banks between Cairo and Johannesburg trading at substantially below one times price to book,” he says. “That clearly points to an opportunity, although there will be winners and losers coming out of the contagion, so it is important to pick the right management team, the right institution and the right dominant market position.”

Schmid also sees value in some industrial shares, where what he describes as “global leaders” are trading at deep discounts to their inherent net asset value. “The key challenge with these,” he says, “is visibility at this point in time, which makes any sort of transacting very difficult at the moment.” He predicts the time to invest will come towards the end of 2009 or the first half of 2010.

Kofi Bucknor, managing partner of pan-African GP Kingdom Zephyr Africa Management, believes that the underlying consumer growth throughout the region will withstand the global economic tremors. “There is a strong case for growth on a pan-African scale based on fundamental consumer demand patterns,” he says. “That case is intact.”

Bucknor points to opportunities in the Nigerian telecoms sector in particular: “There is a fundamental growth story in Nigeria that is about scale. For example, Nigeria has overtaken South Africa as the largest telecommunications market in Africa, while internet penetration in the country is very very low.” Southern African infrastructure is also of interest to Bucknor, who predicts extensive spending on the sub-region's power supply and electricity framework.

The Sub-Saharan investment landscape is a varied one, but a focus on growth is common to most conversations. “The growth finance story, which most private equity managers pursue, will in the second half of 2009 and certainly in 2010 produce some quite interesting investments,” says Evison. With a raft of growing businesses in need of capital, growth investors could well be presented with a rich selection of opportunities.

The proliferation of growth finance – often referred to as the “missing middle” – in Africa is being hampered by high set up and transaction costs for funds, according to industry participants. Growth finance involves providing capital and business support to small- and medium-sized businesses which are too small for the banks and too large for microfinance. “Investors need to understand that 4 percent is typically what you need to manage funds at this level,” said Jurie Willemse, founder of Africa-focused growth finance provider GroFin at a recent seminar in London.

Emerging markets private equity firm Aureos is confident it will reach the $400 million target for its first pan-African fund in the third quarter of 2009. “We expect to have a second closing within the coming two months for another $100 million, and hopefully we will have a final closing on $400 million in the third quarter of this year,” says Aureos partner Brigit van Dijk – Van de Reijt. Aureos began marketing the fund to investors in February last year.