Africa special: Old Mutual on seeking a fair deal

With the equivalent of around $4.1 billion in assets under management across its infrastructure, fund of funds and impact arms, Old Mutual Alternative Investments is one of the largest private equity investors in Africa. Chief executive Paul Boynton discusses which sectors offer the best opportunities, how the right deal structure is crucial and why ESG is such a vital ingredient.

What opportunities are we seeing right now?
As far as investing outside of South Africa, we are focused on two areas. One is infrastructure and the other is as an investor in African private equity funds.

In infrastructure, there’s a huge opportunity to put capital to work. The World Bank puts Africa’s infrastructure deficit at $100 billion-$120 billion a year over the next decade, with 50 percent required in energy. The African Development Bank believes GDP growth would increase by 4 percent a year if infrastructure is up to speed across the continent.

We see a lot of opportunity in the power sectors of some smaller countries. At the moment we are looking at projects in Benin, Mali and Burkina Faso. We are also looking at transport projects in Kenya, Uganda and some of the Francophone countries.

In funds of funds, in North Africa we are seeing activity in Morocco, Egypt and Tunisia. In East Africa things are happening principally in Kenya and Tanzania, along with the commerce sectors of Uganda and Ethiopia. Nigeria has had a currency issue but is still an active market, along with Ghana, the Ivory Coast and South Africa.

In terms of sectors, agriculture processing is important – 60 percent of the world’s uncultivated arable land is in Africa – as are fintech and regional manufacturing.

Is infrastructure investment still hindered by the unwillingness of investors to put long-term capital to work?
With an asset with a longer tenor you are more exposed. But the risk around such projects is often well boxed. We are doing a gas-fired power plant in Ghana. The risk is that we don’t get paid, but the risk is mitigated because the electric utility is backed by the government, and we also take political risk insurance to cover us.

Jurisdictionally Africa is not without risk – it often feels like three steps forward two steps back but over time there is a strong secular trend. Twenty of the 49 countries in sub-Saharan Africa are considered electoral democracies against only four in 1991. The risks are dissipating over time. For instance, 42 countries have enacted a regulatory framework for private investment in infrastructure.

How do you go about finding opportunities?
Apart from South Africa, we have offices in Nairobi, Lagos and Abidjan so are plugged into deal pipelines. We are looking to write equity cheques, not debt cheques, so often a local bank will approach us because investment restrictions prevent them from taking more than a small piece of equity in a project.

In infrastructure, we’ve found a lot of opportunities presented to us. We’ve got a good name in the market and have been around for a while, so it hasn’t been too difficult. 

Development finance institutions are involved in many of the projects because they are a source of debt for these long tenor projects. Many investors in our funds are DFIs. In a couple of projects, they are also equity investors alongside us. 

On the fund of funds side, dealflow is around connectivity. We’ve made it a focus of ours to invest in local teams with people on the ground.

On the fund-of-funds side, how many Africa-focused managers are there?
We run a global fund of funds where we look to invest in managers who are on at least their third fund. That’s more difficult in Africa so we’ve had to compromise on this. 

But there are a lot more players than there were five years ago and investment strategies are a lot more focused. Traditionally, some of the development funding was targeted but those seeking commercial returns invested with generalists.

There’s a greater regional focus. Historically it’s been pan-Africa or supra-regional. Now you’re getting funds focusing on one or two countries, which is a sign of maturity.

Of all the risks of investing in Africa, how high does exchange rate rank?
Exchange rates are a profound risk. In certain instances you can manage it. In infrastructure, much of the costs might initially be dollar-denominated. For example, alternatives to diesel generators such as gas-fired power plants will have a big element of foreign equipment, so you can expect linkage to a dollar tariff or at least a tariff that indexes it quite closely.

Remittability is the other exchange rate risk. Even if your income is immune to the exchange rate, you still have to get your cash out. And with infrastructure, it’s not just about currency convertibility today but over the full tenor of the project, which could be 20 or 30 years. Proper structuring around these risks is really important.

How do you employ structuring as a risk mitigation tool?
In infrastructure we are in it for the long haul. We prefer to have aligned interests with other equity holders and to be managing risks collectively. What rights does the project company have in relation to the construction companies that are building the power plant? What rights do we have against the utility for power offtake, or those running the plant once it is built? These are things we spend a lot of time on.

When trying to hedge our risks, our mantra is: “Find the right partners, negotiate a fair price alongside other shareholders and make sure you bring local partners along for the ride”. If we structure that well and manage the community engagement properly, it should work for everybody.

How accurate a risk picture do non-African or even South African investors have of the continent?
It’s all very well to send someone from Cape Town to open a new office in Nairobi, but in the long run it’s not going to work. They don’t have a read on the local market, they don’t have the connections.

You need to be very humble when going into Africa and making investments. You may think that the more sophisticated investors are from abroad or South Africa, but the ability to assess, analyse and manage investments is in many ways more difficult in the rest of Africa. We’ve pushed this strongly – be humble about what you know and what you don’t know.

Even though we have offices on the ground in places like Lagos, we also try to partner with local investors, so you know all you need to know about the local market.

Why does ESG matter?
The environment in which we are operating and the ability to differentiate with environmental, social and governance is quite profound in Africa. From a social perspective, are we dealing fairly in whatever investment is taking place? That’s a more profound question in Africa than in other parts of the world. If you try to do something in London the community itself will react if someone doesn’t meet their obligations. That’s less the case in Africa.

The DFI community, which has invested in many funds across Africa, has held the investment community to account on ESG and we’ve seen a positive outcome. The philanthropist Mo Ibrahim was once asked: “What are the five most important challenges in Africa?”. He said, “There’s only one – governance”. If you focus on anything else you’re missing the point.

We are all looking to take advantage of opportunities in Africa but investors have to ask, are we building opportunities as well?

This article is sponsored by Old Mutual Alternative Investments and appeared in The Africa Special 2017 published in Private Equity International in September 2017.