International investors view Africa as a ‘frontier market’ even though the continent has long shaken the ‘Wild West’ image the phrase conjures up. The fourth annual African Cup of Investment Management conference, held in Cape Town recently and sponsored by Sanlam Investment Management, has revealed that Africa offers some of the best risk-adjusted returns available worldwide.
Sanlam CEO Johan Van Zyl describes Africa as an untapped continent. “Sanlam entered Africa by chance when we acquired African Life,” he says. “At the time, we placed little value on the African business, but today it is driving our growth.” Sanlam’s experience of Africa is shared by many of South Africa’s top brands, most notably Shoprite and MTN.
“Of all the zones in the world, sub-Saharan Africa is my favourite investment destination,” says David Murrin, CEO and chairman of Emergent Asset Management. “South African investors and asset managers are sitting on a huge opportunity here.”
In his presentation titled Breaking the Code of History, The Geopolitics of modern Africa for investors, he observes that countries in the Southern African Development Community represent the ‘sweet spot’ of African investment and that African investors have a huge advantage over their international peers in judging investments on the continent.
Why is Africa so attractive? Under the guidance of the African Union, now 50 years old, the region has made steady progress in building unity and promoting economic development. Africa’s combined GDP has risen from around US$600bn in 2002 to $2.2tr today and direct foreign investment is on the rise.
Much of this investment is coming from China. “Last year the trade between China and Africa was in excess of $240bn,” says Patrice Motsepe, founder and executive chairman of African Rainbow Minerals. He adds that trade between Africa and the so-called BRIC nations (Brazil, Russia, India and China) reached $350bn in 2012, and is expected to surge to $500bn in the next five years.
China was singled out by most conference participants as one of the most positive forces in Africa. They believe it has underwritten the African continent and in so doing lowered the risk for other businesses entering the region. China’s penchant for improving infrastructure as part of its inward investment strategy makes it easier for smaller firms to follow.
But China’s interest in Africa is not without risks. Murrin warns that investors in sub-Saharan Africa should reflect on the influence that China will have in the region in the long term. “As early as the 1990s China identified Africa as a ‘vacuous space’ in US foreign policy and an area into which China could move to secure much-needed resources,” he says. “Investors should pay close attention to the risks associated with the mass migration of Chinese people, with funding from their government, into Africa.”
Motsepe is not as concerned. He observes that China has learnt a great deal since the 2006 visit of African heads of state to that country and believes that the quality of Chinese investment is changing. Chinese firms are doing more to transfer skills, address labour issues and prevent human rights abuses than before.
Fund managers view Africa as a vibrant opportunity and believe the cycle of unlisted and private equity deals taking place in the region today will result in larger savings pools and wider capital market opportunities for mainstream investors.
The concluding sentiment from the fourth annual African Cup of Investment Management conference is that Africa must be high on the agenda of both equity fund managers and private companies. Success in Africa hinges on being brave enough to explore frontier markets, assessing and breaking down the barriers to doing business there, and taking risks.
Africa offers abundant investment opportunities which the developed world has not yet latched on to. South African capital must take advantage of this oversight by building the right partnership on the ground, thereby securing a share of the best risk-adjusted return on offer anywhere in the world.