African property a solid option for private-equity investors
With African assets cheaper, low valuations are expected to bring buyers back into the market with increased transaction activity and growth
Despite a minefield of potential political and economic risks, the outlook for emerging-market private-equity funds looks positive.
Internationally, institutional investors are allocating more money to private markets to diversify their revenue streams and find alternative sources of alpha in a world of low growth. There’s also been a trend for traditional money managers to buy stakes in alternative investment firms, particularly private equity and real estate managers.
And with rising political risk in developed regions such as the US and Europe, emerging markets are increasingly seen as relatively dependable investments. In the context of sub-Saharan Africa, private-equity funds offer investors access to assets that have strong growth potential in a region where stock exchanges are still developing.
However, for private equity fund managers, deciding which countries and industries to invest in has become more complex. Prospects vary between countries and economic sectors, with adequate diversification a strong defence for fund managers against unexpected and increasingly prevalent local and global events.
Where the global economic backdrop is concerned, the possible effects of Donald Trump’s election win, given his fiscal stimulation promises, as well as the stronger-than-expected US economy, have pushed US share prices to new records.
In the UK, the FTSE 100’s five best-performing stocks in 2016 were all miners. Anglo American’s share price rose 287% and Glencore 206%, while Randgold, Rio Tinto and BHP Billiton returned between 55% and 72%.
The recent performance of mining stocks is based on stronger demand for commodities, which is good news for many economies in Africa. Among the factors supporting the case for steady commodity prices are the global manufacturing recovery, rising inflation, growth in China and continued stimulus measures in the EU.
The World Bank said it expected global growth to accelerate slightly as recovering oil and commodity prices eased the pressure on emerging-market commodity exporters. Recessions in Brazil and Russia will end, but uncertainty over US economic policy could weigh on global growth by keeping investment money on the sidelines.
In its Global Economic Prospects report, the bank said it expected 2017 global real GDP growth to rise to 2.7% from 2.3% last year. Growth in advanced economies is expected to edge up to 1.8% in 2017 from 1.6%, while emerging and developing economies will see growth accelerate to 4.2% from 3.4%.
These forecasts did not incorporate the effects of US policy proposals, including fiscal stimulus from tax cuts, infrastructure spending, and a more protectionist stance on trade.
The World Bank forecasts 2017 US growth at 2.2%, against 1.6% in 2016, but the increase could be larger, providing a boost to the global economy. This could lead to higher interest rates that would present problems to emerging countries that depend heavily on external financing.
Rising US interest rates can also be expected to have a negative effect on emerging stocks and currencies as higher dollar rates reduce the appetite for riskier assets.
Sub-Saharan Africa has had to battle strong economic headwinds after the slowdown in China reduced demand for commodities.
This, coupled with falling crude oil prices, resulted in commodity exporters in West and Southern Africa suffering large current account deficits, worsened by a depreciation of their currencies. Nigeria’s oil-dependent economy is in recession while SA, a major metals and minerals exporter, is flat. Angola and Zambia have also taken strain.
In contrast, Kenya, Tanzania, Ethiopia, Ivory Coast and Senegal are growing rapidly and are expected to expand more than 5.5% in 2017. Cameroon and Ghana are also regarded as promising markets. These economies tend not to be reliant on metals and oil exports, and have benefited from the low oil price.
For the private-equity industry, falling commodity prices dragged down growth, resulting in some deals being called off and slower money flows. Firms have also found it harder to sell or list investments. However, with African assets cheaper, low valuations can be expected to bring buyers back into the market with increased transaction activity and growth.
Lower commodity prices, together with foreign-exchange pressures, have also provided an incentive to boost local manufacturing in many African countries working to overcome expensive dollar-denominated imports, and to source foreign currency.
Foreign currency shortages and exchange-rate fluctuations are among the biggest challenges faced by private-equity investors in Africa.
The Nigerian naira is a notable example, with the central bank eventually devaluing the currency in June 2016 amid serious dollar shortages. Foreign exchange is also in short supply in Ethiopia, where the government maintains capital controls.
As a result, private-equity firms need to account for currency fluctuations in their investment decisions, building portfolios that can deliver returns and withstand volatility.
Some firms adopt a pan-African strategy while others focus on individual countries. Rather than mitigate risk by spreading across economies, single-country strategies usually diversify across economic sectors.
The focus on a single country can mean increased perceived risk, making fund-raising tougher. On the other hand, a private equity fund focused, for example, on agriculture or real estate, can invest in opportunities across the continent.
According to the Southern African Venture Capital and Private Equity Association, East Africa has increased its stake in private equity across Africa, led by Kenya, which recently allowed local institutions to invest up to 10% of their portfolio value in private equity.
Of the 140 reported deals in the first three quarters of 2016, a third of were in SA, with Nigeria, Kenya and Namibia also featuring prominently. Deals were across sectors including industrials, agriculture, technology, healthcare, education and consumer goods and services — consistent with the growing consumer base across the continent.
The investment case for the real-estate sector is similarly strong, as investors with a longer-term perspective recognise the potential for commercial property development in Africa based on positive demographics, urbanisation and growing personal incomes.
Africa’s challenges have tended to overshadow its longer term potential and, in our view, this stage of the economic cycle presents significant opportunities for superior future investment returns.
Adding to the investment case is massive pent-up demand, making commercial property development in sub-Saharan Africa an enticing proposition. The retail sector is among the most underpenetrated globally, with significant potential.
As Africa urbanises and middle-class populations grow, so does consumer demand for products and a modern shopping experience. Indicative of demand for retail facilities is that, despite tough economic conditions, an estimated 20,000 shoppers descended on Novare Lekki, the largest shopping centre in Lagos, when it opened on August 25 2016.
This $80m development has Shoprite and Game as anchor tenants, reflecting our preferred approach to work in partnership with leading South African and international retailers expanding in sub-Saharan Africa.
Importantly, private equity funded property developments contribute to infrastructure, sustainable job creation and currency inflows for local procurement.
• Roper is CEO of Novare Equity Partners, the sub-advisor to Novare Fund Manager