GYONGYI King is chief information officer of Caveo Fund Solutions.
BUSINESS DAY TV: While recent news flow globally seems to have worked in favour of risk assets, we’re taking a closer look now at where Africa’s frontier markets fit into this entire equation. Is Africa accessible enough an investment destination to leverage optimally off any investor bullishness, and for the investor, well what are the investment options he is actually looking at? Joining me now in studio with her view is Gyongyi King; she is chief investment officer of Caveo Fund Solutions.
While we talk of risk assets being back in vogue, I picked up some comment from RMB global investments this morning, highlighting that the easy money may not provide the same amount of flow as we saw before. So in this fight for investment flow right now, where do African markets sit in terms of investment appeal?
GYONGI KING: If you look across at all the risk assets that there are globally, and a lot of the emerging markets have done very well, such as South Africa for instance, African markets have really lagged these. They still haven’t caught up from the 2008 lows after the global economic crisis and all the problems that we had — a lot of the African markets lagged the big rebounds we saw in 2009 and 2010. So from a risk asset appeal, Africa and frontier markets really generally offer a lot more value at the moment than a lot of the EM markets (emerging markets) that have really run quite hard and valuations are looking very stretched ... for growth rates they’re actually coming off.
BDTV: I know that we can’t look at Africa as one homogenous entity and we’ve got to draw distinctions between the various countries, but it certainly does draw attention to what you’re saying to valuations specifically. So what’s the status on that front and let’s talk to some of the macro data versus the company specific data that is emerging for indications of possible disconnect there.
GK: What we’ve seen is 10 years of good economic growth in Africa, so if you look at GDP (gross domestic product) growth, you’re 100% correct. We often make the false accusation of Africa being one big glob when actually it’s a lot of different markets with different drivers. But if you look at where the GDP growth has been, the opportunity set is very wide there. A lot of the companies are just starting to exploit that GDP growth at the consumer level and that’s where the opportunity is, that’s where the valuations are and that’s why even though when you look at the recent market performance, the markets seem to run very hard, but they really are lagging 10 years of solid GDP growth in many of the economies.
BDTV: So we should then see that as an opportunity. Let’s go through the various options out there for investors at this stage. On the equity scene you’ve highlighted that it’s probably the most liquid relative to other asset investments, but there are still concerns around liquidity specifically, and GDP growth doesn’t necessarily always translate into equity growth as well. So what’s you view on those deterrents to investing in equities in Africa?
GK: People are very nervous about liquidity and liquidity definitely needs to be managed. It’s not the same as the JSE and certainly not with anything that we’ve seen in developed or emerging markets. But liquidity - you are being paid a premium for that in Africa at the moment – that won’t last for ever. There are a lot of people internationally looking at the markets, and equities themselves will be the most liquid option for some time to come. They’re the most easily understood globally; there are a lot of different stakeholders involved in equity markets, and what you find is that when people are looking for a first time investment, the equity markets are where they visit, so that will naturally uplift the liquidity options. Having said that, there’s a lot of domestic investment happening across the continent, and that also improves the liquidity prospects for all these markets.
BDTV: Especially with governments looking to grow their fixed income markets a little bit more aggressively and that’s sure to have positive knock-on effects throughout the economy in particular, corporates looking to raise finance – talk us through that shifting landscape.
GK: It’s an interesting one because there’s very little corporate debt in Africa and the reason being is that you need a solid government yield curve to be able to price government corporate debt. It’s very difficult to price a corporate’s debt and how much you should be charging for that when there’s no government debt in issue. So it’s the chicken and the egg scenario and at the moment governments are waking up to that fact. They are issuing more debt even though they don’t necessarily need it or want it and what you’re finding is that the fixed income space is rapidly becoming much more populated with bonds, but also what you’re finding is that a lot of the governments are trying to support, in terms of the corporates, to encourage them to finance like that. So a much more efficient way for corporates to finance rather than going to the bank.
BDTV: That’s on the supply side of things, what about demand, is there a distinction to be made between the kind of foreign investor demand we’re seeing and domestic appetite in the fixed income space?
GK: Domestic investors have been the big investors in fixed income and the reason being that the yields have been incredibly attractive and in many of these economies the forex rates have been fairly flat, you haven’t seen much volatility, inflation has been falling and incredibly the yields have been over 20%, so domestic investors are very much into the fixed income environment and buying everything that’s issued. What we’re seeing is that with the issue of hard currency bonds such as Ghana’s last month, international investors are becoming aware of these attractive yields, looking and examining the markets more closely, and what you’re finding is that you’re getting more investors interested in the space to support this growing market.
BDTV: So that awareness is on the rise. Where does African real estate fit in here? It crops up as a key investment tool amongst South African institutions as the demand growth comes through with limited supply options. Surely that heightens appeal to a large extent...
GK: Real estate has been something that’s crept up quite quickly. A few years ago there were very few vehicles if any that you could actually invest as an investor or an institutional investor, but now there’s quite a number and it’s because the opportunity set is a geared way to play the consumer growth story we’re seeing in Africa. To give you a statistic, there are more shopping centres in Johannesburg than there are in the rest of Africa so the opportunity set is there, and the demand is there more importantly. People want this kind of growth, they want this more structured environment to shop, they want office blocks, so there’s a lot of opportunity. The big downside is there’s not a lot of supply at the moment. People are having to partner the developers, who have already developed the properties, and then these funds are buying into these already developed properties, but this is a very slow process. So whilst it’s an exciting and interesting area for some time, you need to be quite careful about the supply and how much money is being allocated to the area.
BDTV: Is that the biggest risk you face, that you won’t get your hands on any property?
GK: That’s exactly what happens. People have a lot of excitement, they raise a lot of capital off that excitement but then it sits in cash for quite some time because to actually access these opportunities, there’s not a lot of supply and obviously there’s a lot of competition for that supply. So the key component of the whole thing is actually partnering with people who essentially know what’s going on, on the ground, have really plugged into the local market and have good supply chains from the developers.
BDTV: Of course I’m just blitzing through all the investment avenues that are available to the investor out there. Is private equity still amongst the most popular access points into Africa – what return potential are we looking at there?
GK: It’s very difficult to say and very difficult case specific. Private equity has traditionally been the most popular access route as you say, a lot of people historically internationally and NGOs, the very early private equity firms were actually NGOs that were financing all of the investment on the continent, and they turned into actual return-generating vehicles and the private-equity vehicles we know today. It is very exciting, it’s fraught with problems, or I should say challenges, not necessarily problems, but you really need to evaluate your exit options, you need to know that the people that are on the ground... private equity in an African environment is not about leverage, LBOs (leveraged buy outs) or it’s not about breakout value, it’s about growth. When private equity firms buy into African concepts they’re buying into the growth and the unlock of that, which means that they need to be much closer to the investments than you would traditionally be.
BDTV: It’s been a pleasure chatting to you.