03 Jan

Top five trends that will drive Africa’s private equity market in 2018

While the rest of the world battles a series of economic and political difficulties, Africa is looking forward to a year of growth and increased private equity investment.

For a general view on the likely global trends in the private equity market in 2018, we need look no further than the developments of the past few years. As growth rates around the world declined, Africa and other emerging markets took on ever-greater significance, and are now pivotal in global private equity activity.

According to Quantum Global’s Africa Investment Index, in 2015, the top five African investment destinations – including Botswana, Morocco, South Africa and Zambia – collectively attracted foreign direct investment of $13.6bn. This was a testament to international players’ growing interest in the continent.

It is true that some of the world’s developed markets will return to growth in 2018, and private equity investors will turn their attention towards them once more. However, Africa’s long-term growth and increasingly transparent and stable geopolitical and economic landscape will continue to support the expansion of private equity across the region.

Private equity has also taken on a greater share of public sector financing in developing markets. Some of Africa’s largest economies have ventured into their first ever public-private partnerships (PPPs), and interest from limited partners and general partners has grown significantly over recent years.

However, the importance of private equity in Africa’s economic development is underpinned by an annual funding gap of around $100bn in the region, along with a soaring youth population. Private equity has also helped to drive much-needed development of the region’s capital markets, which are slowly maturing.

1 – Increased deal flow

Despite political uncertainty in countries such as Zimbabwe and South Africa, there is significant deal appetite and interest in quality assets in Africa. Further north and west, democratic elections have passed in multiple countries, including Angola, which saw its first transfer of power to the opposition party since peacetime in 2002. This should provide investors in those countries with much greater confidence than in previous years.

Deal flow remains high and, given the region’s economic growth, is likely to remain so in 2018. The challenge is one of quality and bankability: management in Africa remains complex for financial, structural and political reasons. These complexities are inherent in all developing markets and will continue in 2018 and beyond. Growth trends in 2018 will demand that general partners deploy highly specialised teams with expertise in specific sectors, in addition to a deep understanding of African markets.

2 – Economic recovery in West Africa

Improvements in commodity prices combined with the region’s expected economic recovery will drive further investment in West Africa. Nigeria and Angola will benefit from analysts’ forecasts that oil prices will rise to around $58 per barrel in 2018, easing public expenditure pressures. Private equity investors and other state players, such as China, will also benefit from a potential uptick in public sector spending on important infrastructure works, and we may see greater appetite for PPPs and general private capital in government-led projects.

GDP figures also recovered across most of West Africa in 2017, and in some cases are forecast to surge in 2018. The IMF’s most recent World Economic Outlook (released in Q3 2017) has projected growth of almost 9% for Ghana in 2018, with an overall rise of around 3.4% for sub-Saharan Africa.

3 – Improved global liquidity conditions

With projected higher oil production and oil prices predicted to rise throughout 2018, foreign exchange liquidity rates are also expected to grow globally. Private equity in Africa will therefore offer a much higher rate of return compared with cash and fixed income assets.

Around the world, borrowing rates and inflation remained stable throughout 2017. This was also the case in many parts of Africa – even in countries that struggled with low forex reserves and the slump in oil prices. Some of the region’s biggest economies, such as Angola and Nigeria, have reined in spending and demonstrated fiscal restraint, including introducing currency controls. These measures have contributed to greater liquidity.

4 – Nigeria attracting more investments

With the value of Nigeria’s economy projected to grow to $650bn by 2022,medium to long-term prospects look optimistic, with solid fundamentals underpinning growth expectations, particularly in the non-oil sectors of the economy. However, the country also faces an $878bn infrastructure investment gap between now and 2040. This figure (which pertains only to infrastructure) is based on forecasts of an annual GDP rise of 4.1% and a population that is rising by 2.4% per year at current trends.

5 – Chinese asset diversification

The slowdown in China’s economy is likely to lead to Chinese investors further exploring opportunities in emerging markets like Africa. Such investors are also likely to pursue increased collaboration with credible private companies and institutions. China has a track record of investing across diverse asset classes in Africa, particularly in infrastructure: as far back as the 1970s, China helped to build one of Africa’s longest railways, the 1,860km TAZARA Railway from Tanzania to Zambia. China is already investing heavily in diverse asset classes across the continent, including Angola’s first ever PPP. The inherent Chinese appetite for diverse assets in Africa spells good news for African governments, many of which have redoubled their efforts towards major infrastructure works over recent years.

As we look ahead to 2018, there is clear evidence that the global economy is improving, even though there are new geopolitical issues on the horizon: namely Brexit, the Chinese slowdown and Middle Eastern security concerns. Despite these issues, Africa faces a year of growth, and will continue to act as a promising destination for private equity investors.

Source: How We Made It in Africa

13 Nov

African Economic Growth Rides on Wireless Rails

A telecommunications boom is lifting an industry and a continent.

In Kenya, hundreds of thousands of people are rising out of poverty as mobile-money services turn subsistence farmers into business people. A similar dynamic drives Ethiopia, the fastest-growing economy in Africa, where the gross domestic product is forecast to climb 8 percent in 2019. Borrowing costs in Ghana plummeted almost 2.5 percentage points during the past 12 months amid an unprecedented gain in GDP that’s been led by the growth of the telecom industry.

From the Atlantic to the Indian Ocean, hand-held phones are letting people become their own ATMs, increasing economic activity by enabling payments for food, travel, school and business. Wireless communication is driving economic growth in sub-Saharan Africa much as the railroad did in the 19th-century U.S., accounting for almost a tenth of global mobile subscribers and a growth rate that’s beating the world.

The transformation is reflected in the more than 1,300 publicly-traded companies that make up corporate Africa. The value of communications firms increased during the past five years to 25 percent of the total market capitalization of African companies, up from 16 percent, according to data compiled by Bloomberg. Materials and energy, the natural-resources benchmarks that defined the region since its colonial days, diminished to a combined 18 percent from 27 percent during the same period.

Read more here: African Economic Growth Rides on Wireless Rails

06 Nov

Senegal – another big rebasing to GDP

We think Senegal is one of the good news stories in sub-Saharan Africa, which will be reinforced as GDP is revised up by perhaps 30% in 2018.

Senegal was one of only two sub-Saharan African countries to be upgraded in 2017

Senegal is the only sub-Saharan African country we follow to get upgraded in 2017, from B1 to Ba3 by Moody’s in April. This put it one notch above the B+ S&P rating which is unchanged since 2000. In the rest of sub-Saharan Africa over 2017, only Burkina Faso received an upgrade from B- to B; it is also in the West Africa Economic and Monetary Union (WAEMU).

There are IMF programmes with virtually every one of the WAEMU member states, which may be helping this positive trend. We have assumed no further change in Senegal’s ratings, but after this week’s visit to Dakar, we see upside risk to ratings in 2018-2019.

GDP to be revised up, perhaps by 30%, improving most ratios significantly

The most likely trigger is the GDP rebasing that should arrive in 2018, which could lift GDP by around 30%. While not as dramatic as this decade’s 60% GDP hike in Ghana or the nearly 100% rise in Nigeria, it will make a significant difference to Senegal’s ratios.

We expect the public debt ratio to drop from 61% of GDP in 2017 to perhaps 46% of GDP in 2018. Gross external debt may fall from around 55-62% of GDP in 2016-2017 to 39% of GDP in 2018-2019, even assuming new eurobond issuance. The current account (C/A) deficit may shrink from the IMF forecast of 5-6% of GDP in 2018-2019 to 4% of GDP and the budget deficit from 3% of GDP to 2%. The only negatives we see are indicators such as exports to GDP (which will fall) or government fiscal revenues to GDP; the latter may fall from a relatively good figure of 20% of GDP now to around 16% of GDP (still better than many in sub-Saharan Africa).

This comes against a strong backdrop of government-led infrastructure spending growth

Senegal already looks pretty good to us (and Moody’s evidently) due to strong 6-7% GDP growth in 2015-2017, a one-third reduction in the budget deficit ratio from 5-6% of GDP in 2011-2015 to 3-4% of GDP in 2017, and a halving of the C/A deficit from 10-11% of GDP in 2012-2013 to 5% of GDP in 2017. We think the WAEMU currency is working for Senegal, with that currency within 1% of its long-term average value (XOF562/US$) based on our real effective exchange rate (REER) model that extends back to 1995. It has been around fair value 70% of the time since 1995, so stability is normal, and we assume will be maintained.

Read more: Senegal – another big rebasing to GDP

15 Sep

Egypt is making renewed efforts to reform its economy

Privatisation has a bad reputation in the country but the government is giving it another go for its economy. THE train north from Cairo winds through the lush fields and meandering canals of the Nile Delta, before chugging into Alexandria. The scenery is pleasant on a 180km journey that can drag on for more than four hours. It is slow enough that EgyptAir offers flights on the same route.

Egypt’s state-owned, 6,700km rail network, the oldest in Africa, has seen better days. Stations are dingy; trains are dangerous and often delayed. In August 41 people were killed in one collision. It was the deadliest crash since 2012, but smaller ones are common, with over 1,200 last year alone. (Britain’s rail network, with three times as many passengers, saw about 750.)

Days after the accident the transport minister said that he would bring in the private sector to improve quality and safety. His ministry is drafting a law to allow private firms to run trains and stations. If it passes, it would be the clearest sign yet that Egypt is serious about reforming its top-heavy economy.

The state has played an outsized role in business since the coup in 1952 that created the modern republic. It ran factories, banks, utilities and even newspaper publishing houses. At one point more than half of Egypt’s industrial production and 90% of its banking revenue came from the public sector. This socialised economy helped create an urban middle class. But by the 1970s it had become bloated and inefficient. Anwar Sadat, then president, had limited success encouraging private investment with his infitah (“openness”) policy.

His successor, Hosni Mubarak, oversaw a real shift. In 1991 his government picked 314 public companies to privatise. They employed 1m people and generated more than 60bn Egyptian pounds (then $21.4bn) in annual revenue, about 15% of GDP.

Read more: Egypt is making renewed efforts to reform its economy

 

18 Aug

Quantum Global’s Africa Investment Index shows Ghana on the rebound

Ghana is the eighteenth-most attractive economy for investments flowing into the African continent, according to the latest Africa Investment Index (AII) compiled by Quantum Global’s independent research arm, Quantum Global Research Lab. In 2016, Ghana attracted a net foreign direct investment of US$3.5bn.

According to research by Quantum Global Research Lab (QGRL), Ghana’s economy has experienced strong and robust growth over the past decade, making its success a case worth emulating by its regional peers. Industry was the main driver of overall growth with an annual average growth of about 13%, followed by services with 8.4% and agriculture with about 8%. The strong growth record has fostered the country’s graduation to lower-middle-income status in 2010.

Commenting on the Ghanaian economy, Prof. Mthuli Ncube, head of Quantum Global Research Lab stated: “Ghana’s democratic attributes are as robust as its economic growth, and by improving policies and institutions, successive governments have been able to build an attractive business climate conducive to growth. These measures include reducing the number of days it takes to register a limited liability company and days spent on resolving commercial disputes in the courts. Furthermore, the election of a new government in 2016 has revitalised the drive for higher growth and infrastructure investment, all which augurs well for investment opportunities in the country.”

The research noted that whilst the economy continued to grow on a steady pace until 2013, the GDP growth slowed from 7% in 2013 to 3.6% in 2016 due to structural challenges – such as the on-going fiscal deficits pushing public debt to over 70% of GDP, trapping the country in a cycle of debt service and borrowing.

Furthermore, a three-year power crisis and power rationing slowed down the private sector’s productivity and competitiveness. In addition, the significant external sector deficit and low world prices for the country’s gold, cocoa and oil exports were a major factor behind the economic slowdown.

Read More: How We Made it In Africa

17 Aug

Value investing in Nigeria

Active managers in Africa and frontier markets have to counter the perceived higher risk of investing in volatile markets prone to political and economic uncertainty. In response, most investors gravitate to growth strategies, pursuing markets or sectors with attractive GDP growth prospects and predictable policy makers. Inevitably, when investors flock to the preferred country or sector, the top-rated companies command a premium valuation, often justified as buying ‘growth at a reasonable price’.

In contrast, value investors hardly have compelling narratives to justify why they are seeking out the least popular markets and acting with conviction when loading up on beaten-down value stocks. The risk of appearing stupid increases as market prices are trending downwards and there is no shortage of ‘cheap for a reason’ arguments. Despite the rigorous analysis, a value manager’s judgment and conviction is tested when the strategy underperforms. The prospect of client withdrawals is a reality check.

The price you pay counts

Empirical data over long time periods and across multiple markets suggests that stock market returns aren’t correlated to economic growth prospects. What matters is the price you pay, or starting valuations. This is no different in Nigeria, currently the largest country weighting in the Allan Gray Africa ex-SA Equity and Bond Funds, which comprise together about 2% of the Allan Gray Balanced Fund.

President Olusegun Obasanjo’s election in 1999 marked a fundamental transition from military rule to democracy. Nigeria had experienced only 10 years of civilian rule from independence in 1960 to 1999. Since then, Nigeria’s relative political stability, combined with a boom in oil prices, fuelled 9.2% growth in GDP per capita compounded annually; whereas growth in South Africa was 3.2% and in the US it was 3.0%. Over the same 17-year period to 2016, Nigeria’s stock market returned 2.8% (in US dollars), whereas South Africa and the S&P 500 delivered 6.0% and 2.5% respectively, as shown below.

But the real story is the period between the bookends. The notable high volatility in Nigeria’s stock market has offered investors greater opportunities to generate superior returns – by patiently buying stocks that thrived when political or economic prospects appeared dim; and selling the popular stocks when other investors were overly optimistic.

Read the full story: How We Made It in Africa

 

01 Jun

Congo Republic inaugurates $109 million hydroelectric dam

BRAZZAVILLE  – Congo Republic inaugurated a $109 million hydroelectric dam constructed by China Gezhouba Group Co Ltd on Monday, in a boost to the oil-producing country’s agriculture and forestry sectors, the government said.

The 19.9 megawatt (MW) dam in the northern town of Liouesso brings Congo’s hydroelectric production to 214 MW, nearly half of total national power output. The country produced just 89 MW in 2000, according to the government.

“The Liouesso dam will give great productive capacity to the businesses installed in the region,” President Denis Sassou Nguesso said at the inauguration ceremony, though his infrastructure minister noted the government had yet to find buyers for three-quarters of the dam’s output.

Oil accounts for around 65 percent of GDP in the central African nation, Africa’s fourth-largest crude producer, but it is aiming to diversify its economy by increasing investments in infrastructure as well as in the mining and forestry sectors.

Read More: Congo Republic inaugurates $109 million hydroelectric dam