21% of respondents to a recent LP survey expect to increase allocations to sub-Saharan Africa, with 17% looking to increase the pace of investment into the MENA (Middle East and North Africa) region. This is on the back of growing interest in the underlying demographic and economic changes on the continent, as well as the emergence of strong, local and international fund management brands, investing in Africa. Unlike most mature private investment markets, Africa’s working age population is growing and becoming more affluent. As a result, there is an increasing demand for consumer goods, electricity, financial services, and housing, together with a stronger commercial case for infrastructure spend.
In this first part of a two-part series we ask: As a fund manager with an Africa focus, how can you attract capital from non-African investors?
The most active investors in Africa funds tend to be those with a “double bottom line”: they invest for a commercial return, but they are also motivated by the positive impact their investments make, socially and economically. Development Finance Institutions (DFIs), as well as in-country government pension funds have a mission to invest in Africa and will often be the first money into an Africa fund. Fund managers that hit the fundraising trail without (at least) soft commitments from DFIs will find the journey tough, as potential investors are bound to ask “why couldn’t you get backing from the DFIs?”
Whereas Europe is home to many single-country funds, it is more difficult to raise capital for individual African markets from investors outside of the continent. Common objections raised to these strategies include concerns around the quality of dealflow in individual markets and the concentration risk of running an Africa portfolio that is insufficiently diversified by geography. Significant economies, such as South Africa, Nigeria, and Kenya, have proven their ability to attract investors into single-market funds, but most successful fundraisers have employed a regional or pan-continental investment strategy.
The infrastructure needs of the continent, along with the demographic themes of growing urbanisation and affluence, mean that investors with less knowledge of Africa can find strategies that target specific sectors particularly attractive. Africa housing, sustainable energy, infrastructure and agriculture funds are disproportionately popular, and consumer focused strategies may also face less resistance.
Many successful, large Africa funds have built a “hybrid” team, consisting of a combination of locally-born market experts and international colleagues, with global financial services backgrounds. These are classic ingredients for a successful team. Investors will want to feel comfort that a manager is able to effectively network and conduct business in markets that may seem opaque and confusing to outsiders, and alumni from top-tier international investment banks and private equity firms add a further level of reassurance to international investors.
Investors may expect Africa funds to have a particularly strong focus on ESG, promoting sustainable development and ethical practices. Some international investors will be especially sensitive to the perceived reputational risks of investing for profit in Africa (including corruption, inequality, exploitation, and political instability). Fund managers need to be aware of ESG expectations and should be able to demonstrate the positive social, environmental and economic impacts of their investment activity.
 The 2017 EMPEA (Emerging Markets Private Equity Association) LP Survey, page 7
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