This article is sponsored by Old Mutual Alternative Investments
The IMF’s global real GDP growth rankings may surprise you. In its World Economic Outlook 2019, tied for the top spot at 8.8 percent real GDP growth are Ghana and the Republic of South Sudan.
At third, fourth and fifth place are Rwanda, Ethiopia and Cote d’Ivoire respectively with 7.8 percent, 7.7 percent and 7.5 percent.
They sit comfortably above the emerging market and developing economies average of 4.4 percent. We asked Paul Boynton, Cape Town-based chief executive officer at Old Mutual Alternative Investments, what lies ahead for the continent.
Across the continent as a whole, the IMF expects 3.6 percent GDP growth this year. How do these figures translate into opportunities on the ground?
Dealflow in general has picked up recently. It’s hard to know what to attribute that to specifically but it’s possibly due to increasing optimism, more realistic pricing from sellers and the particular areas of the market on which we focus.
In any case, one of the spaces we see as opportune for investment is logistics: ports, road and rail, airports.
We’ve put money to work there over the past several years and we think there’s opportunity across Africa, particularly now the African Continental Free Trade Agreement has come into play. The opportunity for African countries to trade with each other is enormous.
Are there any particular standout markets?
We have offices in Abidjan, Lagos, Nairobi, Cape Town and Johannesburg. Historically we haven’t been present in North Africa, but lately we’ve been looking there. I was on a trip recently to Egypt, where there is a dynamic economy – for instance in housing development there’s a lot going on – and evidently strong capacity within government departments.
The one difficulty of course is the military is very involved in the economy. It’s a new space for us to look at and one we’re quite interested in.
What about sectors?
Recently we’ve put money into distributed rooftop solar, both commercial and residential. Of our $4.8 billion under management, $2 billion is invested in infrastructure through our African Infrastructure Investment Managers division.
Over the next decade, Africa needs $150 billion a year of investment in new infrastructure. The availability of government and multilateral funding is no more than half of that. There’s an enormous opportunity for the private sector to participate. We are stepping up against that need.
We’ve also invested in retail in South Africa as the economy turns a corner. Our private equity business is largely focused in South Africa and our Impact Fund business only in South Africa, although we are evaluating opportunities elsewhere. Our Impact model leverages scale and that’s more difficult to achieve in the rest of Africa, certainly in the smaller countries, but we’re optimistic.
In Africa, why is investing in private assets more attractive than in the listed or pre-IPO spaces?
First, deep liquid exchanges don’t really exist other than the Johannesburg Stock Exchange and the Egyptian Stock Exchange. Second, the exchanges are not generally representative of the economies as a whole.
Large parts of the economy may not be accessible to an investor in a listed context. For instance, tourism may be a big part of the economy in a country but there aren’t any listed tourism opportunities.
The third point is that private equity as an investment structure is particularly well suited to Africa because of its hands-on nature. In the listed markets the governance risk is challenging.
“Africa needs $150 billion a year of investment in new infrastructure. The availability of government and multilateral funding is no more than half of that”
In the private equity world, you’ve got one or two team members sitting on the board, in strategy meetings and remuneration committees. They will have rights to assess and, significant circumstances; veto the executive, which affords profoundly important risk mitigation.
In listed markets the investor is much more reliant on the ecosystem working well and that directors behave properly. Peer pressure is important.
That works well in a more developed market, but in developing markets it can be a risky proposition. And lastly, private equity provides a clear route in and out of your investment. In the listed market you can get in but at exit it’s unclear whether the market can deliver a fair price and sufficient liquidity.
How do you make the distinction between private equity and impact investing?
Our private equity strategy has shifted from a traditional leveraged buyout model to focus on growth investments; buying medium-sized businesses and supporting bolt-on acquisitions, increasing market share and geographic expansion largely for businesses initially focused in South Africa, although many of the companies we’ve invested in have an Africa growth agenda. Our impact funds have a different origin. The team was set up to identify a social need and seek out opportunities where we could staple a social objective to a commercial one and generate returns commensurate with the risk. That’s important. If we don’t deliver returns that make sense to investors then our funds are not sustainable longer term.
South Africa has a housing deficit of around two million units. Through our affordable housing fund we intend to deliver 80,000 units.
We’ve invested across the value chain: taking vacant land and servicing it; taking serviced land and building apartment blocks or single residential buildings for sale; investing in rental stock; and backing alternative mortgage providers to try to mobilise capital.
We box that all together. More recently, we’ve developed a retirement accommodation fund that has a similar set of principles.
Our second impact vehicle was an affordable education fund. Our goal was to deliver 40,000 pupils in school by the time our investment programme completes and improve educational outcomes. We are delivering at a price point of about $150 a month; that’s the cost of a child to attend school. To date, that fund has delivered end of school exam results about 20 percent above the national average.
How do you measure success?
If you look at our affordable education fund, we have a financial return objective of Jibar plus 4 percent. We measure ourselves against our net return and then we assess the educational outcome, for instance how many learner opportunities we have created, and the quality of the offer against a specific protocol that measures pupil performance.
Looking more broadly across our portfolio, as part of our ESG programme we run an environmental and social management system. We assess each portfolio company on up to 90 different appropriate variables specifically selected to measure progress of the UN’s 17 Sustainable Development Goals.
In a particular asset, we pick only the useful ones where we can make a difference. We are building a database for each portfolio company recording what’s happening over time so we can compare a particular school, for instance, with another we’re invested in, and if we have the data available, against schools we’re not.
That data underpins a conversation between the portfolio company management team and ourselves about how they are doing, what their competitors are doing, and what are appropriate targets, as well as how are we stepping up against them over time.
That means you can compare peer-to-peer but also across your portfolio?
Correct. The intent is to be able to aggregate this data at the fund level, so we can know, for instance, its carbon footprint; how many jobs it created this year; our diversity score – the gender representation at senior management or board level on average across our portfolio companies in a particular fund. As a manager we can say how we’ve done.
How do you make sure these measurements are integrated across the investment lifecycle?
The issue in this space is implementation, not aspiration. At a new portfolio company we will contract upfront around the data included in management reporting. Where we have an existing company and we’re not a controlling shareholder, and that’s generally the case, we will try to persuade management to collect the data and to the extent to which we’re successful, we will put it into our system.
The data bank is a work in progress. It will become meaningful with a five-year history but we don’t yet have that for some investments.
We haven’t gone back with the data because that’s obviously a very costly and time-consuming process, but every year we add another year of history.
With your impact investments, what kind of exits have you seen?
Our impact funds are long-dated, 13-year vehicles, not traditional 10-year funds, because this strategy takes a bit longer to see returns. The schools fund has been going for five or six years and we haven’t exited anything yet.
In the housing space we are building and exiting continuously. To date, we have developed 13,000 housing opportunities and exited those.
We have 26 greenfield housing developments, across which we are continuously commissioning and building new houses or apartments as we sell down existing stock. In that fund the assets are ultimately self-liquidating.
In the impact space, because the funding is largely debt-driven, we do see a lot of cashflow in the portfolio. If it’s not redeployed within the portfolio then it’s coming back to investors. Investors have seen some reasonably strong cashflow in those funds already.
Given the deficit in power generation across the continent, where do you see the most opportunity to invest?
There are 600 million people in Africa who are not hooked up to electricity. That’s half the global total. In our infrastructure business power is a focus, both renewable and gas fired.
We’re an investor in a 250MW power plant that’s just been commissioned at Ghana’s Tema Port. Around $1 billion in capital was invested there. It’s a big project. Cenpower Generation will be delivering about 10 percent of the Ghanaian grid capacity.
More recently we’ve invested in a company called BBOXX, which is a rooftop solar installer that operates principally in west and central Africa. It’s a next generation utility platform. They have installed around 7,000 domestic units and using new technology can manage supply to each home.
The ability to terminate access to non-payers allows the business to manage exposure to consumer payment risk. The key is economies of scale that allow management costs to be spread across lots of installations and the price per unit of energy to be kept quite tight.
Estimates put the contribution of distributed solar to Africa’s power generation capacity at 25 percent ultimately. We see it as a growth sector and are looking at a couple more opportunities in this space, including installations on commercial buildings, which carry a different credit risk.
We’ve looked at a lot of models and it’s about assessing which are most likely to prevail. Our sense is there will be a couple of winners in this space but not all.