Perspectives 2017: Angolan SWF sees potential in private equity

FSDEA has nearly $5 billion in assets under management and is looking to diversify revenue sources beyond oil production and trading. It recently increased its allocation to private equity, including infrastructure, real estate, agriculture and mezzanine investments, to nearly 60 percent of its portfolio, up from 34 percent at the end of 2014. However, most in the private equity world won’t be able to secure a commitment from FSDEA as it is focusing solely on investing in Angola and sub-Saharan Africa. FSDEA’s only exposure to North America and Europe will be through its fixed income portfolio.

FSDEA’s private equity allocation is larger than the typical SWF. How did you decide on this allocation?
The investment policy that the government has set out for FSDEA indicates specific industries and asset classes that should make up the portfolio. We believe that equity investments in Angola’s high-growth industries can offer superb returns and also help the Angolan economy to flourish. FSDEA has placed approximately 60 percent of its investments in private equity funds in infrastructure, real estate, timber, mining, healthcare and mezzanine capital, which focus domestically and on the wider sub-Saharan region. These private equity funds target investments opportunities that may offer stable long-term revenues.

Why is private equity particularly attractive?
Equity is a much-needed source of capital in Angola and has the potential to contribute to attract specialised management capacity, add value to local commodities, develop untapped high-growth industries and present future investment opportunities for risk-averse investors once FSDEA deploys its exit strategies. For these reasons, medium- to long-term private equity investments are extremely important to catalyse the industrialisation, investment and expansion of sub-Saharan economies. In many respects FSDEA can be considered a sovereign development fund – a government-sponsored investment organisation that has the dual objective functions of delivering high financial performance, while fostering development.

Sovereign wealth funds that are set up with a developmental role to fulfil domestically or in larger geographical regions display greater exposure to private equity assets than other SWFs, which are set up exclusively for macro-economic management support. SWFs with a developmental role are increasingly common in emerging economies, particularly in Asia and Africa. For instance, Singapore’s Temasek was initially established to commercially manage a portfolio of state-owned equity; FONSIS of Senegal follows a similar strategy and more recently Saudi Arabia began developing a $2 trillion SWF that will focus on new domestic industries that are untapped.

Could you share a bit more about your investment strategy?

The main duty of FSDEA is to create new sources of revenue for the state by investing in a manner that preserves the purchasing power of its equity, generates financial revenues over the long term and caters for the welfare of the citizens of Angola. The investment policy further dictates that, while its start-up capital shall be liquid and initially invested in securities and other capital market instruments, up to 80 percent of it shall gradually be allocated to specific industries and asset classes. Despite, considering investments across Africa and the rest of the world, FSDEA has a strong focus on domestic financial investments in agriculture, industry and infrastructure that support the social and economic development of the citizens of Angola.

Today, FSDEA’s private equity allocation consists of shares in seven collective investment schemes, which are certified and regulated by the Mauritius Financial Services Commission, and target investment opportunities in infrastructure, hotels, healthcare, agriculture, timber, mining and mezzanine finance within Angola and other sub-Saharan African countries. The $2.7 billion that has already been dedicated to these investments are one of the largest private equity commitments to the sub-Saharan region in our continent today.

What is Quantum Global’s role in relation to these direct investments?

This undertaking has been developed from scratch with the solid support of various other specialised consulting firms, which were co-ordinated by Quantum Global, a mid-size investment management firm based in Switzerland. The seven collective investment schemes created, consisted of limited liability partnerships, within which FSDEA is the limited partner (ie, the investor and recipient of all proceeds on equity revenues) and Quantum Global is the general partner (ie, manager of investments with unlimited responsibility over all liabilities). These limited liability partnerships are currently screening, analysing and negotiating and capitalising investment opportunities in the infrastructure, hotel, healthcare, agriculture, timber, mining and mezzanine finance industries, within the sub-Saharan region, which can secure annualised IRRs in excess of 8 percent over the next 10 years.

Can you update us on the $456 million agriculture and healthcare investment funds in Angola?

In 2015, the Angolan SWF committed $238.8 million to FSDEA Africa Agriculture LP and $217.6 million to FSDEA Africa Healthcare LP. These funds have been paid into the limited liability partnerships dedicated to healthcare and agriculture industries. Whereas we anticipate that within the next four years all of the equity allocation to these vehicles will be completely invested in business ventures that can earn annualised IRRs in excess of 8 percent over the next 10 years, the investments should come on stream this year. For instance, FSDEA has recently secured the concession of seven large-scale farms in Angola that comprise approximately 72,000 hectares of farmland dedicated to grains/oil seeds and rice.

What about debt investments?
One of the collective investment schemes developed and funded by FSDEA focuses exclusively on developing mezzanine financing opportunities domestically and in the wider sub-Saharan Africa region. It is industry agnostic, due to the other sector-focused allocations which FSDEA is expected to fulfil, and it is well positioned to meet the needs of industries that are entrepreneur driven and may catalyse regional growth. This investment vehicle targets greenfield and brownfield opportunities for early stage, expansion and exit.

Through preliminary research, we learned that within the regional landscape there is a substantial lack of available capital to enable the market entry and growth of the traditional senior debt providers. Therefore, leveraging subordinated debt in the form of mezzanine finance as well as providing quasi-equity capital is a lucrative solution that supports the growth of new businesses across the region.