The Gateway to Africa is Found in London

Euromoney magazine, May 2014

A fund manager with a microfinance twist, with most of its portfolio in Nigeria and Kenya. An investment bank and private equity house focused on Portuguese-speaking Southern Africa. A donor-supported African infrastructure fund that has completed 47 deals across the continent.

Euromoney finds the executives of these businesses not in Luanda, or Lagos, or Nairobi, but in Holborn, Mayfair and Cannon Street, London. As interest in frontier investment and the African demographic story has grown, the UK capital is hosting more and more businesses who find London a vital part of the mix because of its access to global capital.

To see this as it ran in Euromoney, click here

Alquity is a case in point. This fund manager, incorporate in 2010, has a novel approach to what it calls “Life changing investments.” It’s an emerging and frontier market investor using an ESG screen, but on top of that puts 25% of its revenues into microfinance to support people in the areas within which it invests. But it’s not purely philanthropy: it argues that these donations help to create a culture of entrepreneurs, and along the way consumers, which in turn helps the investments in the main portfolio.

“If you’re going to invest into these economies, it makes absolutely no sense to leave 50% of the population economically inactive and marginalised,” says Paul Robinson, CEO. “How can that possibly make sense? Especially if you’re going to invest in businesses linked to the emerging consumer, you want to support those and drive development.” Alquity partners with Opportunity International, the microfinance network, Examples of recipients have included a man who owns a cosmetics goods stall in Blantyre market in Malawi and a woman who has set up a school in Ghana. “When you feed the grass roots economy, all of these people become consumers,” he says. “It’s a good end in itself to help people, but it is just as much helping ourselves.” For example, a key holding is the pan-African mobile telco MTN. “The first thing someone buys when they’ve got a bit of money in these markets is a mobile phone. And they will spend money in a local supermarket.” Another top holding is Ghanaian supermarket chain Shoprite.

Alquity invests purely in equities, and as of February its Africa Fund (whose assets shot up from $22 million to $60 million during 2013 and $73 million at the time of writing) was invested in 10 African countries: chiefly Nigeria, South Africa, Kenya and Egypt, but also smaller holdings in less obvious locations like Mali, Mozambique and Botswana.

So how is it practical to run such a business from London?

“If you’re going to be based in Africa, where would you be based?” says Robinson. “We are closer to Egypt than you would be in Johannesburg. If you’re going to be on the ground, really your only options are South African and here.”

More to the point, there are practical advantages around access and capital. “Because we are dealing in large cap listed stocks, they all come to London. If you are in Ghana and you want to talk to global investors, you are going to come here.” Alquity does spend time on the ground meeting companies on their home turf before making investments, but finds the distance from local bias, and the ability to consider, worthwhile. “One of the best fund managers in the UK in recent years has been Perpetual. It’s done them no harm being based in Henley rather than being dragged out for lunch by brokers who may be conflicted. Out there they can reflect.”

On top of that, there’s London’s other advantages. “The regulatory environment, the rule of law – those are incredibly important,” he says. “While there is a great investment opportunity in these markets, some of their systems are still going through a journey to get to what we would call first world.”

*

A mile or so to the west are the offices of Eaglestone, an investment bank that was launched in January 2012 with a twin focus: sub-Saharan Africa, and in particular the Portuguese-speaking countries of Angola and Mozambique; and renewable energy. It combines corporate finance advisory, asset management (chiefly private equity) and brokerage.

Strictly speaking, the business is incorporated in Amsterdam, though there is nothing but an administrative office there; spiritually, you might say, it’s based in Angola, where it has a carefully-developed mix of expatriates and local ability, and where the bulk of its investments (leaving aside some renewable power projects in South Africa after Eaglestone bought an established venture there called Kensani Eaglestone Capital Advisory) are likely to be in the near term. But London is a vital part of the mix: it’s where the deputy CEO and founding partner, Nigel Purse, is based, as well as the CFO, general counsel and many other of the senior staff. “This office in London is really about the outward-facing part of  Eaglestone for the investor community,” Purse says. “If you want to attract investors into your funds, the chances are that many or most of them have representation here in London rather than locally in Sub-Saharan Africa.”

Eaglestone differs from Alquity in that it does believe strongly in on-the-ground representation: that’s where all the origination of transactions takes place. Purse and Eaglestone CEO Pedro Neto were board directors together at Espírito Santo Investment Bank; Neto was also chief investment officer of Escom, a company within the group focused on Angola. Today, Neto bases himself chiefly in the Angolan capital of Luanda. “The most important thing is that you are doing business in Sub-Saharan Africa, you have to be locally present there,” says Purse. “Doing business there on a fly-in, fly-out basis is not viable or credible. It doesn’t help you maximize your opportunity, it doesn’t help you manage risks properly, and if you are not present in local markets you cannot be expected to understand how they perform and have good execution capability.” The firm has local offices in Luanda and the Mozambique capital, Maputo. Neto adds: “More than having offices on the ground is having teams with local people. Because in order for us to guarantee our future, just having a bunch of expats down there doesn’t work.”

Nevertheless, the Eaglestone model, already somewhat unorthodox in having the Portuguese-speaking focus, stands out too for its understanding that local focus can be meshed with international capability. For Purse and Neto, the opportunity was very clear. “For example, if you are in the business of setting up a private equity asset management business – and lots of people have – they have by and large succeeded in raising the money to do so,” says Purse. “But where they have really struggled is in finding high quality investment pipelines to invest in. Investors have concerns about how you realise value; how you exit things later on.” That’s where the local end fits in.

Then there’s the London research end. “One of the reasons we set up the research function is that we have to explain the opportunity to everybody,” Purse says. “I’m not going to claim to be the first research house to produce a report on Angola. But we have a team of people set up to do regular and consistent coverage of those marketplaces. That is part of the mission here, and it’s partly why we’re set up in London.”

Neto believes strongly in the business’s area of focus. “If you look at the last 10 or 20 years, Angola has been ranked in the first three places [in Africa] in terms of growth. It will probably not keep those first places, but Mozambique will occupy them because of the gas sector.” Angola, he says, which has enjoyed oil and gas investment for many years, is now about to enter a period of industrialisation and the development of sectors outside of natural resources. “You are now starting to see new types of investors coming to the market: Turkish investors, South Korean investors, trying to catch up with China, and going into different sectors. That has a knock-on effect in real estate, on many areas: you see the number of airlines that are increasing their flights to Luanda. The pressure on the growth side is enormous. Now it is the growth of the consumer.”

Purse calls it “a watershed moment, because you are now starting to see the emergence of a substantial, rising middle class with disposable income.” And Mozambique, now investing in LNG, will likely follow the same pattern, “seven years from now.” Luanda has the added appeal of a pending stock market.

*

One group that has long seen the appeal of running an Africa business out of London is Frontier Markets Fund Managers, which is responsible for the Emerging Africa Infrastructure Fund and Guarantco, which provides credit enhancement for local currency debt issuance in Africa.

FMFM is South African-owned – it was sold last year by Standard Bank to another South African fund manager Harith – but has always been London-based. The larger part of its business is in managing the Emerging Africa Infrastructure Fund, which has so far completed 47 deals with $930 million committed. This is a donor-backed fund which started out with money from the UK’s Department for International Development and Barclays, and was subsequently joined by the Dutch, Swiss and Swedish governments. It does not seek dividends or returns, and is instead intended to provide development gain, though FMFM itself is a fee-earning and profitable fund manager.

“We do senior and unsubordinated debt,  we don’t do equity,” says Nick Rouse, CEO. “We go out to find the deals we lend to’ we market ourselves and visit regularly places like Nairobi, Lagos and Johannesburg. But we didn’t leave the office we would still have a deal flow, because with debt, you can be reactive to opportunities, if somebody’s got a credible infrastructure project, they’ve already raised the equity and the project sponsor is out there looking.

“If you’re in an equity business then you must be on the ground, identifying deals and meeting entrepreneurs. But with a debt business, we don’t need people on the ground.”

Over time, some of the fund’s priorities have changed. “If you go back to 2002, mobile telephony was just getting going in Africa,” Rouse says. “It was the big part of the portfolio in the early days, but as it became a very successful business, a lot of the deals were refinanced. Most of that financing is now provided by local commercial banks in local currency.” Subsequently the fund moved more into fixed line, and in particular power generation. “Other sectors have been more difficult. We have still not identified a water project we would want to do. There are very few toll roads, and railways have only got going when linked to mining projects. And mining companies don’t want their lines interfered with by slow passenger trains.” Geographically, Nigeria has always been the biggest single market, and still is. “There are tremendous opportunities in Nigeria, though obviously it is a difficult place. The easiest place to do business is probably Kenya.” Other active places have included Eritrea, Mozambique, Rwanda, Sierra Leone and the DRC.

It has been a successful business despite the risks one might imagine to be there: there have only ever been two impairments in the infrastructure fund, and both have been recovered, while Garantco has only ever had one guarantee called in in its history, which was turned into a loan and will likely be recovered in due course (besides which it was in India, not Africa – Garantco is a global business).