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Let me begin by wishing you all a very happy and prosperous 2017, on behalf of all of us at the MFW4A Secretariat.
2016 was a rewarding year for MFW4A. We were proud to host the first Regional Conference on Financial Sector Development in African States Facing Fragile Situations (FCAS) in Abidjan, Cote d'Ivoire, jointly with the African Development Bank, FSD Africa, and FIRST Initiative. The conference attracted some 140 policy makers, business leaders, academics and development partners from over 30 countries, to discuss the role of the financial sector in addressing fragility. The conference has already led to several initiatives by MFW4A and our partners in the Democratic Republic of Congo, Liberia, Sierra Leone and Somalia. We expect to build on this work in 2017.
Our support to the Conférence Interafricaine des Marchés d'Assurances (CIMA), the insurance regulator for francophone Africa, helped them to secure financing of EUR 2.5 million from the Agence Française de Développement. The funding will help to expand access to insurance in a region where penetration rates are less than 2% - well below the average for the continent. We worked closely with a number of our funding partners to help define their strategies in Digital Finance and Long Term Finance. These results are a clear demonstration of how the Partnership can directly support the operations of its membership.
With the support of our Supervisory Committee, we took steps to ensure the long term sustainability of the Partnership. The approval of a revised governance structure which fully integrates African financial sector stakeholders, public and private, was a first critical step. The ultimate objective is to expand membership and build a true partnership of all stakeholders in Africa's financial sector.
2017 will be a year of transition for the Partnership. It marks the end of MFW4A's third phase, and the beginning of its transformation into a new, more inclusive partnership, with an expanded membership. We will focus on revamping our value proposition to provide more focused, needs based services with the potential to directly impact our current and potential membership. In so doing, we hope to consolidate MFW4A's position as the leading platform for knowledge, advocacy and networking on financial sector development in Africa.
In closing, I must, on behalf of all of us at the MFW4A Secretariat, thank all our funding partners, stakeholders and supporters, for your constant support and encouragement over the years. We look forward to working together to strengthen our Partnership.
With our best wishes for a happy and prosperous 2017,
MFW4A Partnership Coordinator
African Governments have a key role to play in promoting private equity as one of the major potential sources of investments for enhancing growth and development in their countries. Areas for government intervention include the following:
Improving the legal and regulatory environment: The private-equity industry needs policies and regulatory frameworks that foster its growth. Policymakers need to have deeper understanding of the industry in order to develop these policies. Most private-equity funds on the continent are registered in countries with good regulations, and flexibility in the free flow of funds. No player wants to set up a holding company in a country with fund transfer restrictions.
Building the talent pool: Private equity is effective only when managers are prudent in using capital to grow businesses in a sustainable manner. In Africa, however, the industry is still new and the continent lacks adequate skilled and experienced fund managers. Governments should create the enabling environment for Africa to attract and retain more talent in the form of skilled and experienced managers, specifically with operational experience, in order to make the industry grow.
Creating awareness among key private-equity players: There is limited knowledge about the industry in a number of countries, as well as very little or no engagement between private equity industry players and regulators, resulting in communication gaps between them. Policymakers need to understand the issues affecting the industry, including political risk. There is, therefore, a need for greater engagement between policymakers and private-equity actors.
Improving availability of funds for the private equity industry: Finding adequate financial resources for the private-equity industry remains one of the major challenges in many African countries. This calls for an urgent need to explore how Governments could facilitate the flow of capital into private equity. Normally pension funds are restricted in what they can invest in for reasons of prudence, including even restrictions in investing in companies that are listed on stock markets. African Governments should find a way to ensure that these pension funds are invested in private equity, albeit wisely and responsibly. They are also encouraged to explore co-financing and co-sharing opportunities with other private-equity investors, in sectors such as infrastructure financing (for example energy, telecommunications and water). The Ghana Venture Capital Trust Fund is a good example of such a public-private partnership initiative, partly financed by the Ministry of Finance and Economic Planning.
Encouraging investment of local African capital into private equity: Building up private equity in Africa entails accelerating development of the ecosystem and sourcing investments from local capital markets and funds. There is a need to improve the knowledge of local African investors through education, better understanding of the asset class, incentives and the regulatory framework. Significant sources of local capital (pension funds, family offices, sovereign funds, high net worth individuals, diaspora) can be tapped both for investing and exiting private equity assets.
Encouraging more impact investments: Adequate consideration should be given to investing in sectors that could positively change the lives of many people, while making decent returns for the investors. In this regard, Governments should provide special incentives for private equity firms to put their money into sectors such as agriculture, where the majority of the poor are actively involved.
Other enabling measures to enhance the role of Governments
Enabling measures need to be specific to each country. Private equity is not exclusively driven by the size of an economy or opportunity. Some countries have policies that are friendlier to private equity-friendly than other countries. Governments need to maintain policies that allow them to foster growth. The macro, political and socioeconomic situations are the driver for an enabling environment.
Governments should therefore make the effort to implement and sustain strong macroeconomic reforms. Governments should strengthen the bond and equity markets by introducing securities-lending, encouraging new listing requirements and supporting companies for listing and post-listing, especially as there are not many companies listed in sectors such as agriculture and oil and gas. Governments are also urged to open sectors such as telecommunications, banking and insurance services for investment, as these provide key opportunities for private equity investors.
African investors cannot move around as easily as foreign investors. This deters local investment. Governments should enact policies that encourage local investors and foreign investors alike. In this regard, implementing protocols on the free movement of people and capital across the continent will be very beneficial.
Furthermore, efforts to accelerate the achievement of the objectives of Africa's regional integration in areas such as trade facilitation and infrastructure networks can greatly boost the ecosystem for private equity and for investments in general.
*If you find value in this excerpt, you may enjoy reading the full book, Innovative Financing for the Economic Transformation of Africa, a publication of the Economic Commission for Africa (ECA).
Africa represents a small percentage of the global investment banking business, but the activity is expected to expand in the years to come in view of already apparent economic opportunities.
According to Thomson Reuters, the commissions generated by investment banking activities in Africa amounted to $318 million in 2013, of which $232 million was in South Africa alone. This is modest when compared to the levels in the rest of the world, which generated $82.6 billion in commissions in the same year, returning to its levels of 2007. Globally, the five largest investment banks are based in the United States, and their market share increased by 2.5% in 2013. JP Morgan is the leading global investment bank, generating $6.4 billion in commission (7.8% of the total), followed by Bank of America Merrill Lynch ($5.8 billion), Goldman Sachs ($5.1 billion), Morgan Stanley ($4.7 billion) and Citi ($4.2 billion). The investment banks operate mainly with major clients (companies, investors and governments) providing advisory services (mergers and acquisitions), intermediation (loans) and long term financing operations (IPO, issuing of debt in the form of bonds). Here, we distinguish between corporate finance, global capital markets and structured finance operations.
The continent's outlook for economic growth makes it an attractive place for investment banks
The continent's economic growth quite logically feeds financing operations, the development of the capital markets, and advisory services, all areas of which investment banks are actively involved in. Many activities will require the intervention of investment banks with the arrival of multinationals, the restructuring of the banking and telecommunications sectors, the exploitation of new mining deposits and the launch of major public investment programmes.
Africa, like the rest of the world, is experiencing a change in its strategy to financing for development. Traditional donor interventions are often inadequate to meet the financing needs for infrastructure, while the traditional means of mobilising resources at the country level (taxation, etc.) face major challenges. As a result, the continent is increasingly turning towards local and global capital markets to access new financial sources.
The world leaders in corporate banking (BNPP, SGCIB, Natixis, HSBC, Citibank and Standard Chartered) as well as investment banking (Rothschild, JP Morgan, Goldman Sachs, Deutsche Bank and Crédit Suisse) are very active on the continent. Alongside them, local players such as Standard Bank, Rand Merchant Bank, Renaissance Capital, EFG Hermes and Attijari Finances Corp are well established. These are followed by new players who have recently entered the market, including United Bank for Africa (UBA), First Bank of Nigeria (FBN) and Ecobank, all of which have created their own specialised subsidiaries (UBA Capital, FBN Capital and Ecobank Capital). Currently, African banks dominate the mobilisation of funds in local currency.
In order to adapt to market changes and the new opportunities presented, many banks have announced the repositioning of their investment banking activity in markets outside South Africa. Nedbank, for example, merged its corporate and investment businesses, while Standard Chartered Bank redeployed in Africa, and Barclays Africa has announced that it has high expectations of its African markets outside of South Africa, which remains the most attractive location to date.
Today, we observe that the international banks in Africa carry out their investment banking activities in Anglophone and Francophone countries, unlike the retail-banking sector where we see a certain linguistic preference in their regional expansion strategies.
Mergers and acquisitions (M&A)
The volume of announced M&A deals in the continent increased by 30% between the first half of 2012 and 2013. According to Mergermarket Group, M&As targeting sub-Saharan African companies totalled $26.7 billion in 2013, an increase of 20% over 2012. The traditionally targeted companies in natural resources, minerals, oil, gas and infrastructure were replaced in 2014 by targets in the telecommunications, media, banking, insurance and consumer goods sectors. 2013 was marked by a record level of operations, with the sale of 28.6% of ENI East Africa to the Chinese company CNPC for $4.2 billion, and the acquisition of 20% of the Rovuma Offshore Area 1 Block (off the coast of Mozambique) by Indian company ONGC Videsh for a total of approximately $5 billion. Alongside conventional industrial investments, private equity operations are expanding through funds such as Helios, Emerging Capital Partners, Abraaj and African Infrastructure Investment Managers (AIIM). In the first eleven months of 2014, the share of M&As carried out inside the African markets reached $29.2 billion for 413 operations, whereas M&A operations targeting Africa amounted to $40.7 billion for a total 730 operations. There were some major market operations in late 2014, such as the takeover of Pepkor, a south African retailing giant, by Steinhoff for $5.7 billion, in Chad, the state bought Chevron assets ($1.3 billion), the takeover of the South African and Nigerian assets of Lafarge by Lafarge Wapco (now known as Lafarge Africa Plc) for $1.35 billion, or the sale of several oil wells to Nigeria for $5 billion by Shell.
A necessary rationalisation
According to Konrad Reuss, in charge of the sub-Saharan Africa department at Standard&Poors, "the heady days of international bonds issued by new players or from frontier markets, such as those of the African countries over the past two years, are over. The periods when we witnessed oversubscription are no longer with us". The reduction of the quantitative easing policy of the US administration is also partly responsible. The new policy is changing the bond issue conditions for countries whose economies are in difficulty, according to S&P, which is anticipating an increase in the cost of eurobonds. For Miguel Azevedo, "The Africa of the past was more a land of pioneers and adventurers. Today, the major players are returning. It is becoming much more mainstream". Recent history has shown that governmental agencies are ready to intervene in Africa (World Bank, AFD, AfDB, EIB, KfW, etc.), as the risks in Africa are not, in the end, much higher than in other places (the United States or Europe). The profitability level remains very attractive for projects to be funded on the continent.
Dr Estelle Brack Estelle Brack is an economist, specialising in banking and finance in developed and in developing countries.
Happy New Year to you and your loved ones! 2014 was an important year for the MFW4A Partnership Secretariat, characterised by substantive progress in the implementation of our 2012 - 2014 Strategy and our move from the African Development Bank's (AfDB) temporary home in Tunis to the Bank's statutory headquarters in Abidjan. The move was made possible thanks to the resilience and goodwill of our staff who worked hard to ensure business continuity.
The third Partnership Forum in Dakar, Senegal, in June 2014 was a significant milestone for us. The event provided a unique opportunity for African opinion leaders, financial sector stakeholders and development partners to take stock of progress in Africa's financial systems, share experiences, exchange best practices, and discuss innovative approaches to challenges facing African financial systems. All of us at the Partnership Secretariat are grateful for your enthusiastic support as evidenced by the participation of more than 350 delegates from over 40 countries. Our thanks also go to the Organising Committee for putting together such a rich event. You can view a selection of photos from the Forum on Flickr, and download the full Forum report from our website.
In 2014, the Secretariat placed special emphasis on its work with African financial sector stakeholders. The Advisory Council was revamped and reconstituted as a smaller body with a mandate to provide advice and effectively support and contribute to the Partnership's strategic objectives. We look forward to engaging with our new Advisory Council members in 2015. Last year also saw the establishment of the African Pension Funds Network (APFN), a platform for the exchange of knowledge and expertise amongst industry participants across the continent. The network already counts several achievements, including the release of a joint publication Pension Funds and Private Equity: Unlocking Africa's Potential, with the Commonwealth Secretariat and the Emerging Markets Private Equity Association (EMPEA).
We also continued to strengthen our existing networks, including the Community of African Banking Supervisors (CABS), whose 2014-2016 work plan and budget was endorsed by the Association of African Central Banks (AACB) Bureau. In agricultural finance, we supported the Comprehensive Africa Agricultural Development Program (CAADP) through institutional support projects. We hired an agricultural finance expert with the support of GIZ to help with the policy process in the CAADP implementation. GIZ also funded a study to review the status of agricultural finance policy coordination across five African countries. You can download the Synthesis Report in both English and French.
Another cornerstone of our success in 2014 was our commitment to support regional and pan-African networks. We launched programmes to support the Conference Interafricaine des Marches d'Assurance (CIMA), the insurance regulator covering 14 francophone countries in West and Central Africa; and, the Conseil Régional de l'Epargne Publique et des Marchés Financiers (CREMPF) the capital markets regulator for the West African Monetary Union (WAMU), to raise funding for their respective market development strategies.
We also continued to coordinate donors' efforts to support financial sector development. The Housing Finance Donor Working Group (DWG) initiated discussions on the launch of a training programme for the francophone participants, in collaboration with Cape Town University and under the leadership of the Agence Française de Développement (AFD). Moreover, work plans were endorsed for both the Digital Finance and Remittances DWGs with plans to launch joint donor interventions in 2015 that respond to the priorities of Africa's financial sectors.
Our website was upgraded in 2014 to provide an enhanced browsing experience. The high and continuously increasing usage of the website, blogs, social media, newsletters, press digests, and the knowledge centre that houses publications confirm the value of MFW4A's knowledge products and services. We have also developed an Online Collaborative Platform (OCP) designed to facilitate interactions among MFW4A working group members, foster knowledge sharing and promote peer-to-peer learning. Last but not least, we have been maintaining a comprehensive Donor Projects' Database that is proving useful for our stakeholders seeking information on financial sector related projects in Africa.
Our Annual Supervisory Committee (SC) Meeting was held in December 2014, hosted by the German Federal Ministry of Economic Cooperation and Development (BMZ) in their headquarters in Bonn, Germany. MFW4A SC members, staff, and some Advisory Council members discussed the Partnership's new three-year Strategy, expected to be endorsed at the end of January, 2015. The 2015-2017 Strategy will put the Secretariat and the Partnership in a stronger position to deliver the change that Africa's financial sector needs. Specifically, the Strategy aims to:
- Transform MFW4A from a partnership of donors to a partnership between donors and African financial sector stakeholders;
- Elevate the Partnership from its current position of a knowledge hub into an effective catalyst for positive change in the financial sector landscape; and
- Ensure long-term financial sustainability for the Partnership and the Secretariat.
The achievements of the MFW4A Partnership Secretariat are the result of hard work and commitment of our partners and African financial sector stakeholders. I would like to extend my heartfelt appreciation for all of your support and engagement with our vision. MFW4A has become a key voice on financial sector development in Africa, and a lot of the interaction and the sharing of the knowledge and experiences in the field stem from the Partnerships' initiatives. Let's continue to keep this positive momentum going!
MFW4A Partnership Coordinator
Local Capital in African Private Equity: An Interview with Sev Vettivetpillai, Partner, The Abraaj Group13.10.2014,
You have been investing in Africa for two decades and pride yourself on being local as opposed to GPs who manage their funds out of London or New York. How much local capital financing have you mobilised for your African funds to date?
Over the years, we have raised about US$150 million from local institutional investors, representing a mix of banks, pension funds, social security funds and corporates. We raised some local capital in the 1990s with the CDC Group plc, and, in the last ten years, we have secured commitments from the likes of the National Pension Fund of Mauritius, South Suez, which has several of the local pension funds in southern Africa in their investor base, and Nigerian banks, which came into our funds under the Central Bank initiative.
How significant is the unlocking of huge amounts of local capital across Africa to your strategy, particularly with your funds going forward?
Local capital is an important part of the overall story in Africa. If Africans and African institutions are not investing in their own markets, why should somebody from outside the region think there is an opportunity here? To give credibility to the story they must invest, otherwise the story doesn't hold together.
The markets in Africa are all at different stages of development in terms of regulation and knowledge about this asset class. For example, in Nigeria, the regulatory framework has changed considerably and pension funds are increasingly able to invest in different asset classes. South Africa and Botswana may be a bit ahead of the game; however, Botswana's internal markets lack depth, so the investment strategy is oriented more externally. Then you have the South African pension funds, which have a lot of capital and are now starting to look beyond South Africa. As you can imagine, South Africa combined with the rest of Africa is a great story. So for them, understanding the challenges and the characteristics of investing outside of South Africa is their learning curve.
Limited partners in these markets face different issues, but I can see them all converging to form a very big investor group in the next five years. They are starting from virtually zero in terms of exposure to private equity, so allocations are going to go up from 0-5 per cent to maybe 10 per cent or 15 per cent of their portfolio. On the other hand, pension fund assets under management are increasing at exponential rates because their markets are growing, and more people are coming into the workforce. The importance of African pension funds as a source of capital is not to be underestimated.
What are some of the key challenges in raising local capital in Africa?
Getting the pension fund managers to understand how to build their private equity portfolios is the biggest challenge. I was at the Private Equity Master Class for Pension Funds at the African Venture Capital Association Annual Conference in Cape Town in 2013, which was organised in conjunction with the International Limited Partners Association. There were about 30 pension fund analysts in the room and the question was asked: how many have a private equity programme already? Only one put a hand up. How many have started to invest? Three more hands went up. How many are yet to start? The balance of the hands went up. So imagine the J-curve effect of investing in a private equity programme - these funds are going to have to commit capital based on their own risk/reward profile, and there's going to be a net cash outflow for a period of time until the cash flow starts to mature. That learning curve is going to be a challenge for many of them.
African pension funds often have concerns around liquidity, transparency and lack of benchmarks when it comes to private equity. How do you respond to them?
Pension funds should be looking at fund managers that have raised their third fund or beyond, because a first-time fund manager is a high-risk strategy. For pension funds, the loss of capital is a much bigger issue than the need for liquidity in the short term, relatively speaking. Each private equity fund is illiquid; you are tied in for 8-10 years. But the returns and the cash multiples should compensate for that illiquidity. If they don't, you are choosing the wrong private equity fund managers. One way to manage illiquidity is to have a co-investment program, and invest alongside the GP in larger deals. This gives you the ability to adjust the cost and liquidity because you're not tied up for ten years; you can sell your stake and get cash back.
You need to invest in GPs that provide you with the level of transparency that you need. If they don't, then you shouldn't invest with them. Look at the reports that they give on their fund, and understand how much of that information is transparent and can give you visibility of the underlying portfolio. This should be a key part of the due diligence process.
On lack of benchmarks, the first AVCA/Cambridge Associates benchmark study has been presented, and while it does not yet cover all the private equity funds in the region, what we saw was that performance is in line with Asia and Latin America. African funds are not doing any worse. The average returns, over the last ten years, of the industry are 10-12 per cent. As more information becomes available, this benchmark point will be further addressed. In addition, data from RisCura in South Africa show that the growth in the public equities market is not as strong as it is in the private markets. Pension funds have to get into this asset class or they will lose out on this significant growth.
What advice would you offer pension funds about risk and risk mitigation?
It is important to be aware of all risks - from financial to reputational. Please remember that the higher your returns, the more risk one assumes, and risk does change. Look to get back your capital and protect your downside on each investment. Look at the structures and the terms. Make sure they are applicable to you based on your risk/return profile. Don't partner with the wrong people; test the intent of your sponsors through negotiations to ensure that they are aligned with you and share the same values. And don't follow a herd mentality because LPs have done so in the past and burnt themselves badly.
Markets by their very nature tend to be volatile. We can expect one, maybe two, cycles minimum in a 7-10 year period. So building a portfolio to weather those cycles is key to ensuring that this volatility does not significantly affect your pension fund. I would encourage every fund manager to look at diversifying by country and sector, and to also look at splitting invested capital to receive returns in the form of income contractually built into the structure and capital gains. This allows you to de-risk your investment as quickly as possible, because you are not waiting for a single liquidity event to get your original invested capital back. It also helps deal with exchange risk because of currency devaluation in these markets.
How well aligned is private equity with the long-term obligations of African pension funds?
The average pension contributor in Africa today is very young, so pension fund liabilities are going to increase further down the road. The pension funds, therefore, have to invest in assets that will build long-term value, like private equity. At the same time, GPs need to understand the pension funds' level of experience and not take advantage of them. For instance, I know of managers in other markets that have gotten away with deal-by-deal carry as opposed to a full fund pay-out carry, because the pension funds were not aware of the consequences of this misalignment. Of course, this may be to the managers' advantage initially, but it will eventually be a disadvantage to everybody.
Do you think that GPs are doing enough to encourage pension funds to look at private equity, or can they do more?
GPs can and need to invest more in educating local pension funds. We at Abraaj are prepared to do so - we travel to every pension fund event to which we are invited and provide any information that we can. These investors may not commit immediately, or even invest in an Abraaj fund, but that's fine. This is bigger than that - it's about increasing the pool of capital available to the whole industry. If we as managers do not get on board now, in five years it will be a much harder job.
This interview is an extract from the newly released publication "Pension Funds and Private Equity: Unlocking Africa's Potential", a joint-publication by the Commonwealth, MFW4A, and EMPEA with the support of The Abraaj Group.
Sev Vettivetpillai is a Partner at The Abraaj Group and a member of its executive and investment committees, with over 20 years of direct private equity investing experience. Mr Vettivetpillai previously held the positions of Chief Executive Officer of Aureos Advisers Ltd. and Chief Investment Officer for the Aureos Group. Prior to joining Aureos, Mr. Vettivetpillai was a senior investment executive at CDC Group plc. His other appointments were at Vanik Incorporation (Sri Lanka) as a Portfolio Manager and Mott Macdonald Group (United Kingdom) as an Engineer.