According to London-based Insparo Asset Management, not investing in Africa and the Middle East in 2010 is like “not investing in the emerging markets in the 1990s, SE Asia in the 1970s and Japan in the 1950s.”
Insparo CIO/CEO Mohammed Hanif founded the company in 2007 after specializing in emerging markets for both Bluebay Management and Dresdner Kleinwort Wasserstein. Insparo’s flagship Africa and Middle East Fund, which just marked its second anniversary, has assets under management of $175 million, a minimum investment of $1 million and holdings (as of May 2010) in countries including Ghana, Cote d’Ivoire, Zambia, Qatar and UAE. FINalternatives' Mary Campbell caught up with Hanif in London recently and asked him about investing in a part of the world his company considers “the last frontier.”
Is Africa still the place to be, investment-wise?
Absolutely, the story for Africa is a long-term story; it’s not something that’s a function of the pre-crisis world. If anything, it’s actually proven itself to be more resilient or uncorrelated as an investment opportunity through the crisis and post-crisis as well.
What impact did the financial crisis have on the Middle East and Africa?
The regions suffered a second-derivative effect both in Africa and the Middle East which was the withdrawal of capital – for them it has been a liquidity crisis as a result of what was a wider de-leveraging and write-down of assets in the Western world. A lot of fast money and non-dedicated funds in these regions, as global emerging market funds looked to diversify away from traditional Emerging Markets which had become pretty much commoditized (recall as early as 2006 the market calling for Brazil to have been investment grade, Venezuela five-year risk was trading at 165 over US treasuries by 2007).
Now, you take a look at that and where do you go for return and diversification? As a result, non-dedicated funds started to pick the low-hanging fruit in Africa and the Middle East. As the crisis started to bite, those were regions that they withdrew from very quickly. Many such investors didn’t really understand the region, as it was not mainstream. The withdrawal of all that liquidity, both from the Middle East and Africa, did have an impact and was seen in the region’s equity markets first. Subsequently banks were recapitalized as they were globally. Whilst there was not really a direct sub-prime-exposure-led value destruction, the leveraged model wherever it existed, broke down with serious consequences. The one sector this had a significant impact was real estate. We all know the story in Dubai.
And yet, both the Middle East and Africa proved resilient in the face of the financial crisis, why was that?
There are a number of reasons for the relative outperformance of the regions. Firstly, if we look back at the cause of the credit crisis, sub prime real estate, you can see why. No such thing existed in Africa (one can argue that “prime” did not exist let alone “sub prime”) and neither region was a natural buyer of the leveraged products created from this sector – they were not caught holding toxic leveraged debt originated by the West’s banking system. Secondly, the levels of leverage in their banking sectors were significantly lower and funding structures more appropriate, albeit more so in Africa than the Middle East. The financial sector as a whole did not rely upon the leveraged model that we had become accustomed to, to deliver targeted returns.
However as mentioned earlier, they did suffer a subsequent liquidity crisis, but they were able to address this from a much stronger footing – the governments were able to address this liquidity event relatively easily. For example, in Dubai they came out with a recapitalization of the banks to the tune of around 20 billion dirhams relatively swiftly. Now, that was the first round and we saw subsequent rounds of bailouts, ultimately Dubai being bailed out by Abu Dhabi. The Central Bank in Qatar bought all real estate exposure off the local banks allowing them to restructure their balance sheets overnight!
What you did see, though, in Dubai was probably the biggest crash in real estate…But in Dubai we all knew the real estate sector was not sustainable…History has repeated itself many times, how many booms and busts have we seen in real estate? You just look at the Great Crash – what was that driven by? Well, funnily enough, it was real estate. Actually, I urge you to read Galbraith’s essay on the Great Crash which he wrote in the ‘60s about the Wall Street Crash and the Great Depression that followed thereafter, it makes the hairs of your neck stand on end – I wish a lot of financial market participants were reading it in 2006 and 2007, we might have avoided something.
Anyway, it was not a secret that the Dubai real estate sector was due for a correction and it got one, but nevertheless it was still able to deal with it. For example Nakheel, the government-owned property developer in the UAE, on its fundamentals should have been liquidated. It was basically insolvent, but it was bailed out because they could afford to do it through Abu Dhabi and avoid the stigma of default. In Nigeria, you saw a new central bank governor cleaning up the banking sector pretty swiftly, ensuring stress tests were carried out and for those banks that failed, emergency funding was provided. As a matter of fact, guarantees were issued by the central bank for certain dollar-denominated syndicated loans of these banks.
So I guess what I’m trying to say is, why were they able to recover more rapidly? It’s because they came from a better position and they did not suffer from the underlying cause of the crisis, which seemed to take a lot longer to resolve – subprime real estate and leveraged financial products on top of that. Dubai’s a bit of an exception, it was a very leveraged real estate model – I guess the difference there is that they could afford it and it was very much a private issue as opposed to a wider global issue.
As of May 2010, your biggest African exposure was in Ghana – what is it you like about Ghana?
Ghana’s a bit of a darling for us. It’s a kind of dream macro story really, where clearly, everyone knows that there’s oil in the pipeline, to coin a phrase, and [UK oil company] Tullow are on target to start producing in the second half of this year and, if anything, volumes are going to be ahead of schedule and projections. So there’s the commodity dividend from oil that will hopefully be managed well – the good thing is the elections are already over, the money they had to spend on the elections, they’ve already done that…They’re in the process of a rate-cutting cycle, we’ve had nine consecutive rate cuts in the space of nine months, with a stable currency as well, so we see that as continuing – that story has some way to run.
What other African countries are you particularly interested in?
I think Nigeria will always remain an interesting equity story for us, so that’s something that we’re watching very closely. We were overweight Nigerian banks towards the end of last year and we pared our exposure back through April and May, purely because we’d had such a good run in the markets. We still see that as a longer-term story, if you just think about the percentage penetration of bank accounts in the population, it’s still in single digits, whereas mobile phones are in the low 30s now, the potential for growth there is massive.
And then, we look at less obvious sectors as well, which are the second derivative of the growth story in Africa and infrastructure plays. As economies develop and move forward, infrastructure is a massive spend, but at the same time a great dividend for the country in terms of percentage points of growth. So we’re not just looking at the center of the flywheel, but also at the second, derivative effect – such as cement companies, consumer-driven enterprises such as telecoms, breweries, sugar companies and agriculture as well.
Corruption is an issue that always seems to be raised in any discussion of Africa – is it a factor in your investment decisions?
[Laughs] Any more than it is in the US or the UK?
That’s a good point – Bernie Madoff wasn’t from Ghana, was he?
And $65 billion – that’s bigger than some of the GDPs of the countries we invest in. I think the answer to is that, in a way, we’re better prepared for [the corruption issue] because it is something that clearly is part of our analysis and is on our radar the whole time – as it should be with any investor but particularly when investing in emerging markets. We have a system to be able to at least analyze it. I don’t want to tempt fate and say that therefore we’ll always get it right, because corruption by nature is one of those things that is obviously disguised, at any stage and in any country, so therefore it’s very difficult to detect, but at the same time…we only do business with people that we’ve known, we have the ability to research the management and the individuals that we know on the ground … And we take our time. We spend a lot of time with the people that run companies that we invest in. We spend a lot of time with government officials, from the ministry of finance to central banks and regulators.
Are you concerned about the new alternative investment fund manager regulations now being considered by the EU? For instance, the third-country restrictions, given that your flagship fund is based in the Caymans?
Well, the final legislation is still not clear, really, on many points. What we anticipate is that the Caymans will be deemed a tax/information-friendly jurisdiction and hence it will enable us to distribute the fund in Europe. Restrictions on leverage won’t really affect us as we don’t really employ leverage. We still need a bit of clarity on the role of the locally used depository and general implications for custodians themselves, but our custodian relationships are all through global custody agreements with London-based institutions who themselves use sub-custody arrangements locally. So as a manager, we need to adhere to the new compensation structure and deferral mechanisms but this is something that we’re largely doing anyway already. And you know, the implementation of this directive is probably a long way off, so that gives us time to make adjustments as appropriate.