New effort puts focus on Africa

Institutional investment into Africa is set for a boost due in part to a new task force that will work to encourage capital flows into infrastructure projects in the region.

Linked to President Barack Oba-ma's Power Africa initiative, the task force will identify opportunities, address risk and develop structures to connect investors with new projects.

(See story: South African funds slow to invest.)

The group is co-led by the Stockholm-based Swedish International Development Cooperation Agency, known as Sida, and the United States Agency for International Development.

Also present at a round table held to discuss the task force and its operations were four pension funds, two from Sweden and two from Canada, including a representative from the C$140.8 billion (US$131.1 billion) Ontario Teachers' Pension Plan, Toronto.

A source with knowledge of the round table said the Ontario teachers plan was present to counsel and advise on how the task force should shape the initiative, and to provide insight to infrastructure investment in emerging markets.

“It was easy to see there is a gap between what European and U.S. pension funds can invest in given their structures, relative to what is out there to invest in,” said Sarah McPhee, Stockholm-based CEO at Swedish life and pensions provider SPP, which is part of the $75 billion assets under management, Nordic life insurance and asset management firm The Storebrand Group. “I don't think any pension fund has missed the fact that Africa expects high levels of growth — the question is, does that compensate for the risk?”

She said it was clear from the round table — at which she was present — that funds without in-house investment teams to concentrate on Africa would struggle to invest on the continent.

“Therefore investments need to be made fairly simplified and with a high level of guarantee,” she said.

In March, SPP/Storebrand invested $140 million in a green bond — a tax-exempt bond issued for the development of brownfield sites — to finance and promote long-term and sustainable growth through water and energy improvements in Africa. The bond was issued by the African Development Bank.

The risk/reward conundrum is an issue, although improving, according to risk management firm Axioma Inc., which analyzes the daily regional risk/return in African markets.

“Since March or April, risk in most African countries has come down quite a bit, as it has in the rest of the world,” said Melissa Brown, New York-based senior director, applied research, at Axioma. She said risk for Nigeria's financial risk “was about 30% one year ago. As of June 30, Nigeria's risk was 16.77%, with a six-month return of 7.1%. (Nigeria is the largest African country in the MSCI Frontier Markets index.)“Investors are probably more cognizant today than a few years ago about the economies of the investments, rather than being pushed around by local and broader politics,” said Jarred Glansbeek, London-based CEO at consultancy RisCura.

The opportunities lie in infrastructure, private equity and real estate, consultant and money management executives said.

“In real estate, the increasing urbanization and population makes that exciting,” said David Lashbrook, head of Africa investment strategies at Momentum Global Investment Management in London. The firm runs about $100 million in frontier Africa equity and fixed-income investments, but “we do see investors, particularly in the U.K., still not ready to allocate. However, there is awareness and willingness to start talking about it,” he said. The manager is looking to raise $250 million in a new Africa real estate fund. Parent firm Momentum Group runs $32 billion.

The opportunities extend beyond traditional infrastructure, to storage and data, said Mr. Glansbeek.

But investors can also play to Africa's developing equity and bond markets. Year-to-date through Aug. 14, the MSCI Emerging Frontier Markets Africa index gained 12.93% in dollar terms, outstripping the MSCI Emerging Markets index, which returned 9.07%. It also outperformed over one-, three- and five-year annualized returns.

Another reason for exposure to Africa is risk diversification. “Over the last five years, Africa ex-South Africa correlation to world markets (has typically been) around 0.35,” said Grant Cullens, CEO at African Alliance Asset Management, based in Johannesburg. The manager runs about $1 billion.

Despite the opportunities, institutional investor interest in the equity and bond markets on the continent ex-South Africa remains stifled.

Figures from data provider eVestment LLC show that, as of June 30, its All-Africa Equity universe had $24.4 billion of institutional assets, with net outflows of $38.1 million over the three months to that date. Peter Laurelli, New York-based vice president and head of research at eVestment, said in e-mailed comment that, overall, this is a segment of the industry “which has grown exponentially post-financial crisis (AUM was $261.7 million as of June 30, 2008), but in the last several quarters there has been some negative investor sentiment.”

The data show outflows for five consecutive quarters, following inflows of $2.4 billion for the three months ended March 31, 2013.

Pensions & Investments contacted a number of U.K., European and U.S. pension funds, few of which identified exposure to Africa aside from allocations to general emerging markets strategies.

“There are three basic types of investor: those already involved in Africa, which is a small minority and mostly in the early private equity funds; a rising number who are curious but unsure how they can scale up into small capital markets; and those who don't think Africa is important or relevant ...,” said Melissa Cook, New York-based founder and managing director African Sunrise Partners LLC, which works to bring private-sector capital to sub-Saharan Africa.

But some pension funds hold African government bonds. “Returns on Nigerian government bonds are well into double digits,” said Rick Harrell, Boston-based vice president and senior sovereign analyst at Loomis, Sayles & Co.

PBU, Copenhagen, the 47.7 billion Danish kroner ($8.6 billion) pension fund for early childhood teachers, holds Africa market government bonds and also has potential Africa exposure via a microfinance fund.

The 242.3 billion Swedish kronor ($35.2 billion) Stockholm-based pension fund AP3 holds Africa Development Bank bonds, said a spokeswoman. She did not disclose the value.

Liquidity is another concern.

“On listed equities, although Africa is made up of 54 countries, only 17 have a stock market,” said Mr. Lashbrook.