May 11, 2018
Making Africa’s Case for Institutional Investment
In April 2018, Allianz announced a commitment to the long-term funding of an African infrastructure fund. It’s $120 million 12-year investment, which is underwritten by western development agencies, reflects the essence of what it means to invest in Africa.
A smart way to gain respect in Africa is to align the institutional investor's interests with that of the investment itself and the good it serves the broader community. We have to respect the long-term nature of Africa’s growth. For institutional investors, the best way to get a good return in a higher risk environment is to mitigate risk by investing in large-scale infrastructure assets, rather than short-term, high-risk projects. The second element at play is perceived risk. I have come to understand, over many years of working with long-term assets in Africa that the journey is long but worth it.
Institutional investors know that Africa comes with risk and they know that the continent has a significant infrastructure gap. World Bank statistics show that only 35% of Africans have access to electricity. Right across the continent, there is a shortage of practically every infrastructure asset class – electricity, transport, housing, hospitality. Institutional investors, therefore, understand that there are tremendous opportunities. The question is, is Africa too risky or is the perception exaggerated?
Part of the challenge is trusting the sources and the sustainability of data used to make a satisfactory risk assessment. African data is less reliable, mainly because it’s simply not collected. This is why it is important for investors to if at all possible, build a local presence. I have learned the importance of developing a sense of partnership – not least because it engenders trust on both sides. The economies of many African countries are also less stable so even in what may appear to be a good market; there are risks. Foreign currency reserves fell dramatically in many African countries after the oil price shock, sending inflation rates soaring. Immediately, restrictions on the use of the USD and repatriation of foreign reserves turned previously sunny uplands into a nightmare for investors.
Understanding Risk in Africa
While no country can ever be shielded from global shocks, institutional investors can align themselves with the right kind of investment decisions taken for the right reason. It is clear to all that African economies will continue to face higher risks than their developed counterparts: they have booming populations and not enough jobs, an issue that poses short-term political pressures. However, those risks are also an opportunity. They have to be. Indeed, the safest way to get a return in Africa is not to expect one in the short term, unless you’re prepared to adopt significant risk. Investors must genuinely understand the nature of long-term investments in a volatile environment and they must then choose partners who have a strong local presence, who have gained faith and trust by local communities and policymakers.
Investors must, therefore, do their homework. Institutional investors should analyze precisely what is happening geopolitically in African countries: where is the money currently coming from? Has a project already seen capital from other sovereign funds (Chinese State money funds many large African developments), the State or other private equity firms? What is the ethical background of the current basket of investors? Are the macroeconomics favorable – foreign reserves, tax regimes, rates of interest and inflation – and how have they previously fared throughout global economic shocks?
Despite significant positive change across the continent, including the recent removal of historic dynasties and internationally approved free and fair elections, the continent continues to pose political risks. This inescapable fact must be acknowledged, understood and accepted by all who consider investing in African projects. This is another reason why stable investment platforms must be created – platforms that can act as a gateway for other institutional investors. Portfolios must be mixed: collateral backs the aforementioned $120 million infrastructure investment in more than 40 projects and underwritten by development agencies in Britain, Sweden, Germany and many other countries. Our Quantum Global Research lab focuses on investment data and trends that help in decision making by developing advanced economic insights, built upon tangible evidence and analyses. The research it is developing helps to uncover opportunities for policy innovations and sustainable investments for African countries. This kind of intelligence is much-needed in a region that is overflowing with opportunities but still sometimes is seen as too risky.
Looking ahead, the investment climate is likely to improve. Politically, the direction seems to be invariably towards greater political accountability and the ejection of despots and corrupted leaders. Many African countries, particularly Angola, Botswana, Ghana, Mozambique, and Nigeria are undergoing rapid urbanization, which is underpinned by a major demand for infrastructure. Institutional investors can see that in the broader economic ecosystem, these countries have made significant progress regarding political stability and investment in skills and infrastructure. The African Development Bank (AfDB) suggest the annual infrastructure gap is around $170 billion per year. The demand for investment is also driving an increase in public-private-partnerships (PPP’s), such as the Port of Caio, Angola’s deepwater port in its northern province of Cabinda. Part-funded by private equity, government money and Chinese investment, the development is a long-term project that will transform container shipments into the region and act as a significant catalyst for local, national and regional supply chain growth.
The alignment of national interest (government support), foreign state investments and institutional investors is an important dynamic. Angola’s port development is the country’s first PPP. It has opened the door for many more. Cooperation between the state and private investment emphasizes the need for supportive policy and regulation in the public sector so that institutional investment can be unlocked and sustainable economic growth can be hastened. Africa’s security and economic sustainability does rest on investment and development – a dynamic cycle that in the long-term acts as a powerful catalyst for socio-economic growth right across the continent.