Institutional investors should adopt a long-term investment horizon towards their African exposure as the region grapples with market volatility.
A number of investors have been alarmed by the declining buying power from China and the commodities market rout, and the impact it is having on a number of resource-dependent African economies. Others have also expressed concern about what the inevitable interest rate rise from the Federal Reserve will bring for those African countries that have taken advantage of the low USD interest rates to borrow cheaply.
“The sentiment towards emerging markets is negative across the board. A lot of investors into Africa got burnt in 2008, and there is still a bit of hesitation about returning. While there is a lot of market volatility in Africa, it does offer long term opportunities. It is crucial investors have patience. However, if investors have a short-term investment horizon of six months or so, then they should look towards other markets,” said Malick Badjie, director at Silk Invest, an investment manager, speaking at NEMA Africa in London.
Interest in Africa among private equity has been strong. The Emerging Markets Private Equity Association (EMPEA) said Africa-focused private equity firms raised $4.2 billion in 2014, more than double the average for the previous five years. The first ever $1 billion Africa-focused private equity fund was also opened in 2015 by Helios Investment Partners. Meanwhile, Abraaj Group closed its third Sub-Saharan Africa fund at $990 million in April 2015.
Despite this, the region carries huge risks. African economies barring South Africa and Nigeria are somewhat hamstrung by a lack of liquidity, which can make investing perilous. “Corporate bond markets outside of South Africa and Nigeria remain virtually non-existent and stock exchanges are very illiquid. Regional integration could address some the problems, with progress for example being made in linking the stock exchanges of Nigeria, Ghana and the Ivory Coast under the West African Capital Markets Integration Council, but there remains a long way to go,” read a paper – Private Equity in Africa – published by Allen & Overy and Global Counsel.
Local regulatory frameworks are also a major obstacle to institutional investors. Restrictions around institutional investor access to local capital, exchange controls and curbs around foreign ownership have hamstrung a number of countries. The Allen & Overy paper said that developments in South Africa and Nigeria could spur on other countries to liberalize, but conceded progress was slow.
Furthermore, corporate governance remains a major challenge. The Allen & Overy report highlighted lacklustre corporate governance in certain countries could put investors at regulatory risk in their home jurisdictions, particularly with the passage of the UK Bribery Act, and the US’s renewed vigour in pursuing breaches of the Foreign Corrupt Practices Act (FCPA).