Fortune favours the brave (and patient)

The Imara Group is one of the pioneers in Africa’s investment banking and asset management space. The group invests in numerous stock exchanges across the continent. Jaco Maritz spoke to John Legat, chief executive officer of Imara Asset Management.

On the asset management side of the business, does Imara only invest in stocks and bonds, or is it involved in private equity as well?

John Legat, chief executive officer of Imara Asset Management

John Legat, chief executive officer of Imara Asset Management

In our offshore funds we only invest in listed equities on the stock exchanges. We don’t get involved in private equity but our corporate finance/advisory business is looking at private equity. That is more their area. So the asset management business is purely focused on listed companies and bonds.

How does Imara pick the African companies it invests in?

Initially we’ll look at the ‘universe’ which is roughly ten stock exchanges, outside of South Africa that is. We will then go and visit those countries and will try to see as many companies as possible. We will then narrow that ‘universe’ down to the companies that meet our investment criteria and select the ones we like. So we use a bottom-up approach, which is looking at the companies, as well as a top-down approach, which is looking at the economies themselves to see what structural changes they are undergoing.

Essentially we are looking for companies with good business models. In Africa they tend to be monopoly- or oligopoly-type businesses where they can control their market but where their market itself is actually growing quite quickly due to a rise in incomes.

In our mainstream funds we are trying to take advantage of the growth in the economies and the middle class. As a result our focus is much more on fast moving consumer goods-type companies. This could be supermarkets, breweries and cigarette manufacturers. To a certain extent we also look at construction or cement companies. The focus in the mainstream funds is not really on resources. Resource shares will typically follow the underlying commodity. In Zambia, for example, we don’t have any copper shares because the copper price will determine what copper shares do globally.

Who are the main investors in Imara’s African funds such as the Nigeria Fund, the Zimbabwe Fund and the East Africa Fund?

These funds are professional investor funds and not marketed to the retail populace. The minimum investment is a US$100,000. The majority of the investors in these funds are institutions – largely from Europe but also from the United States.

And how is the demand from within Africa?

Demand from within Africa is especially growing from South Africa. When we first started marketing the African funds in 2005, there wasn’t much interest from South Africa but over the last 18 months we’ve seen a substantial increase in interest from the institutions in South Africa.

Does Imara see itself as a pioneer in the African asset management space?

Imara has been involved in African stock markets for many years. We founded the Botswana Stock Exchange in 1989. We opened the Malawi Stock Exchange in the early 1990s. We’ve worked with the Stock Exchange of Mauritius to get that up and running. We also brought a lot of listed companies to the Zimbabwe Stock Exchange. We are definitely pioneers in that market place. What you’ve seen in the last 12 months, though, is almost the birth of the African asset class and as a result you’ve seen a lot more institutions coming into our space. This is, however, fine because it is more competition and it provides more capital that will develop the markets.

What would you say to foreigners who are still hesitant or scared to invest in Africa?

Africa has got a bad name. Not necessarily in the investment community but just generally. This is not helped by the international media which typically focuses on drought, starvation, politics and corruption; and not enough on what is actually happening on the ground. What you are seeing in Africa today is not too dissimilar from what you saw in Asia in the 1980s or Latin America in the 1990s – a movement from the agricultural side of the economy towards industrialisation. And with that you get growing middle classes.

In Africa, generally, you’ve got rising populations and a growing middle class. And that is very exciting for consumer-based companies. The annual reports of global multinationals, like Diageo, Heineken and Unilever, all comment on the strength of their African businesses relative to the rest of the world. This is encouraging for international investors. It is, however, still very early days in this asset class and people are taking a twenty year view.

Which African countries do you think hold the most potential?

Nigeria has to be one of the most important. The economy will probably exceed the size of the South African economy this year. It has a population of a 150 million people – that is a lot of mouths to feed and demand to satisfy. Nigeria is obviously an oil-based economy but increasingly it is industrialising and growing its agriculture sector. In the past it relied almost entirely on imports but now they are rebuilding their own domestic economy. So I think Nigeria is very exciting.

I also think the whole East Africa region is exciting. A lot of the East African countries such as Southern Sudan, Uganda and the Democratic Republic of Congo (DRC) are opening up and Kenya is the hub of that. I think Zimbabwe is also very exciting. Zimbabwe’s economy is seeing recovery now that the US dollar is the main currency. The attractions in Zimbabwe are in the resource sector where there has been very little investment in the last ten years. So gold, platinum, chrome, coal, gas – in all these areas you’ll see developments in the next ten years.

And how do you feel about the political situation in Zimbabwe?

It is not perfect but it is a much better situation than what it was a year ago before the unity government was formed. South Africa also had a unity government before it moved to full democratic change in 1994. Zimbabwe is doing something similar. Now that there is dollarisation, the government has no influence on monetary policy and the whole area of patronage falls away. Politics in Zimbabwe are far less important than what it was although the media tends to focus far too much on the politics.

Elaborate on some of the challenges Imara have faced over its many years of operating in Africa?

You got to have patience in Africa. In a way that is Imara’s niche. We are a fairly small organisation. The kind of privatisation deals, corporate finance deals, or listings and IPOs that take place in Africa are very small in the overall scheme of things. For global finance houses like JP Morgan or HSBC the fees are just too low. And often those deals can take a long time to come to completion. So those types of banks tend to ignore African markets; and I think to a certain extent, so have the South Africans because it is small in their terms as well. Imara has been in Africa for a long time now. We’ve brought a lot of companies to the market, we’ve done a lot of privatisations. And we’ve got patience. We don’t mind if a telecoms deal takes two to three years instead of six months.

Communications in Africa have always been difficult but have improved enormously with internet and email. Politics can also be an issue in terms of trying to see the right ministers; trying to make appointments; and trying to ensure that those appointments are actually met. And of course transport can always be a problem, although that is improving enormously as well. Things are getting better all the time.