At this stage of the bull market, with the financial world awash in liquidity, it is becoming hard to find neglected assets – those unlikely pockets of forgotten value, perhaps a little off the beaten track. The exotic has become mainstream. Want to invest in property in Vietnam or Macao? No problem: you can choose from at least three or four funds listed on the Alternative Investment Market. Think there's a home in your portfolio for timberland, PFI contracts, leveraged loans or soybean oil? Again, the difficulty is more likely to be choosing from the range of options, rather than finding a way to invest.
But one major market has remained remarkably inaccessible: Africa. Specifically, sub-Saharan Africa. Surprisingly – given its increasing attraction as an investment destination and the positive political and economic developments that have taken place in many countries over recent years – the continent remains probably the most neglected asset market in the world.
Attention is so dominated by the tragedies of the continent that the good news can be overlooked. Most observers miss the diversity of Africa. There are huge differences in political and economic terms between countries. Some have become more politically stable, implemented economic reforms and taken steps to tackle corruption – and they are reaping the benefits. It may still be far from easy to do business everywhere in Africa; local knowledge and experience remain essential. But broad perceptions of Africa as a single, risky, even impossible investment destination fail to recognise the changes of the past decade.
Africa is becoming central to the development of industrialising economies like India and China, thanks to its abundant natural resources. Sub-Saharan Africa holds at least 30 per cent of the world's proven mineral resources.
As demand for commodities grows, many African economies have experienced substantial growth in trade, especially with Asia, which accounts for well over a quarter of African exports (in 2000, it was just 14 per cent).
Oil-exporting countries have grown particularly quickly, but demand for other resources – including metals and agricultural products – mean that the continent's growth has been quite broad. According to the World Bank, 15 non-oil exporting countries have experienced annual average GDP growth of at least 4.5 per cent over a decade, including Mozambique, Tanzania and Ethiopia, and another dozen or so have averaged 3-4.5 per cent. The commercial environment has generally improved too. NGOs and aid organisations have recognised the role that commerce has to play, and supported reforms. The World Bank says it is now easier to do business in at least seven African countries than it is in Greece, Brazil or India.
One obstacle has been under-investment in the infrastructure necessary to enable economic growth. The world (particularly Asia) needs Africa's resources, but there is a need for better transport, communications and power supply. Local governments are not well-placed to fund this. Overseas governments, notably the Chinese, are funding some projects. But there are very few private sector investors in this area. A new fund, backed by the Swiss wealth manager Helvetica and the activist investor Principle Capital Group in conjunction with partners on the ground in Africa, seeks to address this gap.
The fund is called PME African Infrastructure Opportunities. It will seek to build a diversified portfolio of 10-15 significant infrastructure assets, primarily in 10 "focus" countries, including Angola, Mozambique, Zambia and Tanzania. A pipeline of potential deals has already been identified, including opportunities in energy, transportation (road and rail) and communications, both fixed and mobile. The fund aims to get involved in projects at an early stage, bringing in managers who can foster an appropriate business culture and develop the assets to maturity where they can be sold to more mainstream investors. Profits from disposals are expected to be distributed to shareholders.
Clearly, this should be considered riskier than many investments. The fund's team is experienced and well equipped to operate in their focus countries, but, despite improvements in economic and political stability, some of these countries are still somewhat challenging places to do business. There are also risks around execution: can management identify opportunities, buy them at the right price and manage the assets well? The price of the company's shares can also vary from its reported net asset value. But for investors prepared to take a very long view, this fund could provide exposure to one of the most interesting, but least accessible, investment destinations around the world.
Alex Scott is a senior investment manager at Seven Investment Management.Reuse content