Christopher Hartland-Peel, Exotix’s senior African Equity analyst, and Ashley Bendell met with numerous investors across 4 U.S. cities last week to present and discuss Exotix’s recent TOP 30 Africa report. Here is an extract of their feedback
“We also addressed MIT’s Sloan School of Management on Wednesday in Boston, and a group of 25 individuals (Public/Private Equity investors, and representatives of the World Bank and consultant community) in tandem with allforafrica.org on Thursday evening. The majority of these (EM, Frontier, and Africa fund managers) maintain African Equity holdings within their portfolios.
The key trends that we picked up (in tandem with other recent client conversations) are;
SUMMARY
- Nigeria remains one of/ if not the most favored African/ Frontier stock-markets
- Investors interested in, but not hung up on Nigerian political situation
- Zimbabwe not as compelling as in 2009
- When will Ghanian and Ugandan oil come on stream, and how will it impact West / East Africa ?
- Liquidity remains a key constraint to larger funds, yet appetite has increased over previous 6 – 12 months ago
- Frustration at a lack of IPO’s / Secondary Issuance
- Institutional firms preference for a Frontier trading ‘conduit’
- More Frontier/ Africa funds expected in 2010
- There is no common thread between size and style of Frontier/ Africa fund and their ability to raise capital
- Large student (MBA) interest in African [Private] Equity
OVERVIEW
Nigeria remains one of/ if not the most favored African/ Frontier stock-markets
All investors were compelled by the Banking Sector opportunity and expect significant upside in 2010. Most veer towards the well capitalized “good” banks (that passed the Central Bank’s stress tests) with a slight preference towards the largest banks by Mkt Cap’, (GTB, UBA, First Bank) versus the most undervalued (<1 P/Bk - ETI, Access Bank), all of which remain attractive and close to 5 year lows. Banking sector reforms incl. potential consolidation, and the formation of an asset management company, as well as forthcoming FY 2009 results expected towards the end of February 2010 should act as catalysts. Having spoken with the Head of Financial Markets for the leading (London based) IR company in Nigeria this morning, we can expect improved transparency, and detail within these results, whilst continued improvements are necessary and expected throughout 2010 and beyond.
Investors interested in, but not hung up on Nigerian political situation
Many conversations revolved around the Nigerian banks (given their size, liquidity and valuations) which led on to questions about the political situation. Even before this week’s lower House (of the Assembly) support of VP Goodluck Jonathan [as Acting President in President Yaradua's continued absence for health reasons in Saudi Arabia] investors were generally passive with regards to any political instability, or civil unrest, to which we agree. Whilst not fully constitutional, there does appear to be a return to stabilty within the country’s leadership as supported by Nigeria’s 36 Governors. In addition, some questioned the Central Bank’s ability to move banking reforms forward since Yar’adua drove Governor Sanusi’s appointment. As you’ll see from today’s news – http://af.reuters.com/article/nigeriaNews/idAFLDERAFS12320100211?sp=true
- reforms appear fluid, well supported, and forward thinking.
Whilst the Kenyan coalition Government was rarely discussed, one client was particularly nervous about potential violence leading up to and during the next election [2011], and the current coalition government’s ability and willingness to act progressively.
Zimbabwe not as compelling as in 2009
The minority of fund managers that maintain an appetite for this end of the risk spectrum appear to have already invested throughout 2008 & 2009. Others appear to view more compelling opportunities elsewhere (see above). Ofcourse recent news, suggesting that President Mugabe will transfer foreign ownership [to locals], will clearly act as a deterrent for the moment.
When will Ghanian and Ugandan oil come on stream, and how will it impact West / East Africa ?
An important theme expected to drive double digit GDP growth from 2011 in Ghana and Uganda (and indirectly across the East African community incl. Kenya) are the recent Tullow [TLW LN] oil finds. A common question remains unanswered for the moment;- Will the Governments effectively manage these inflows and their distribution to the real economy. We expect this to be well managed given the relative political stability, and timeframe to set effective protocol.
Liquidity remains a key constraint to larger funds, yet appetite has increased over previous 6 – 12 months ago
Nigeria, Kenya and Mauritius are the most attractive markets for many institional funds given their liquidity and inclusion with MSCI’s Frontier Mkt Index – MXFM . The majority of stocks within our TOP 30 report (that trade > USD 500k per day are listed within these markets) and will remain the go to names for institutional funds and those with an emphasis on liquidity. However, on this trip, versus
last July’s, it was apparent that a greater number of investors were now happy to move down the liquidity scale for a “compelling’ opportunity. The second tier of [liquid] markets include Botswana, Zambia, Zimbabwe, the BRVM, and Ghana, and remain attractive to the smaller Frontier hedge fund community.
Frustration at a lack of IPO’s / Secondary Issuance
The Equity IPO pipeline has provided scant opportunity since Safaricom’s 2008 summer IPO, whilst we have seen a steady flow of (Sovereign, State, and [less so] Corporate) debt issuance across many markets within the last 12 months. Whilst this has undoubtedly been a factor contributing to the stockmarket [under] performance amongst these [less liquid] markets we foresee increased corporate Equity/ Rights issuance going forward, and the proposed medium term privatization of some of Kenya’s assets.
Some investors understandably remain frustrated at the lack of new liquid, sizable (by Mkt Cap) public investment opportunities. Whilst a common African stock exchange is a LONG way off we may see potential [cross] listings in South Africa, or London in tandem with a GDR/ ADR program which would increase international appetite, diversify the ownership structure and provide additional impetus for primary listings. With all this said, expect these markets to develop slowly over the short-term.
A positive note is that the relatively small African Private Equity community (lead by large, and well established firms like, Actis, Helios, Kingdom Zephyr and ECP) is thriving and attracting a growing number of talented graduates pushing for roles across African Private Equity. They will help to develop opportunities that should ultimately benefit the public investor in the not to distant future.
Institutional firms preferance for a Frontier trading ‘conduit’
Institutional fund managers on the whole prefer to trade through international firms offering ‘one stop’ access to these markets, such as Exotix. Without dedicated Frontier / African trading coverage the international investment banking/ brokerage community is likely to see the lions share of volumes from the frontier/ EM community due to – , common delays in communication, unfamiliarity with trading protocol, often required hand holding, and settlement delays. With that said, anecdotal evidence suggests that the African stock markets are operationally more straightforward than their Frontier counterparts. This ties in with some managers [relative] frustration at the administrative requirements of setting up [custody] in new African markets. With all this said, day to day execution is well managed in tandem the right trading partners, and focus.
More Frontier/ Africa funds expected in 2010
These are split fairly evenly across the larger institutions, and new hedge fund launches (which are being set up by distinguished (ex instituional) Emerging markets investors). Expect 3-4 more in H1 2010 across the USA, and similar growth across Europe.
There is no common thread between size and style of Frontier/ Africa fund and their ability to raise capital
Frontier funds are in marketing mode, and are beginning to see investors bite, having awaited a [slow] return of risk appetite. The larger institutional/ hedge funds clearly have a significant [in house] marketing presence, whilst the smaller funds (< USD 50m AUM, which have been performing well versus the MSCI Frontier Index, whilst underperforming the MSCI EM index) are competing within an increasingly congested space (relatively speaking of course) . Are there enough Frontier $’s swishing around ? I think there will be, as we are seeing a trend of interest develop across the ‘Frontier’ in general, but how quickly is difficult to predict.
Large student (MBA) interest in African Private Equity
As I mentioned in my end of year email (having presented at Wharton, Harvard, Columbia and NYU Stern in 2009), I continue to be inundated by highly capable (often MBA) students looking for opportunities across Private and Public Equity. Whilst corporate opportunities, and the [African] recruiters representing them, offer a great variety of opportunities across the continent, the world of investment doesn’t for the moment given the limited number of established PE (and Public Equity) firms focusing purely on the continent (less than 25 African Private Equity firms). These PE firms are hiring, so expect the established firms to grow in size quicker than the number of PE firms.
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