Untapped frontier for investment

Corporate debt in sub-Saharan Africa could be the last great investment opportunity, says Standard Asset Management.

It is the last untapped frontier for most investors. Sub-Saharan Africa faces several political and economic challenges, but as risk premiums in emerging economies in regions like Eastern Europe and Latin America start to come down, it could be an attractive alternative.

Standard Asset Management has been given the mandate by the Overseas Private Investment Corporation (OPIC), a US government initiative, to manage the Standard Africa Development Fund.

The fund will invest in a range of public and private debt instruments across Africa, excluding the North and South, with the aim of supporting the continent's capital market development.

Alia Yousuf, head of emerging markets, Standard Asset Management, says that many African countries have benefited in recent years from high commodity prices, debt relief and improved governance.

The fund will include an element of sovereign debt, mainly for liquidity purposes, but the main intent is to help small and medium sized businesses to access the capital they need for growth.

"The way it works at the moment is that either you have financing for the big infrastructure projects or you have really short term financing that the local banks give out to companies," says Yousuf.

"In between, there isn't really that much financing available, so this is really the gap we want to reach.

"We will finance them in local currency to be able to take a local currency exposure and we will finance them in long term debt, between three to seven years, which is very rare in the corporate space."

The fund will adhere to certain social responsibility guidelines.

"For example, we will not invest in any products that will have a very negative impact on the environment, and we will not invest in military production or tobacco," explains Yousuf.

"The agricultural sector, housing development, microfinance, small manufacturing companies - these are the kinds of companies we're looking at."

Many of the deals to be included in the fund will not go to market, but will be negotiated privately. It will be run as a joint venture between Standard Asset Management, based in London, and Standard Bank, which is based in Johannesburg and has a wide coverage throughout Africa, giving it good access to deal flow.

OPIC has promised US$100 million to the fund, and Standard Asset Management aims to raise an additional $200m. "In general, the trades we would like to do range between $5m and $20m of investment," says Yousuf. "That depends on the borrower, and it depends on the deal."

It is seeking a minimum of $5m from each investor, which will mainly come from institutions since the fund requires a long term commitment and an understanding of sophisticated transactions.

"It's very difficult to say what kind of returns we would make because there is no benchmark, but in the past, investing in Africa, current funds we hold have made 20%-plus returns," says Yousuf. "We're looking at between 15 and 20%, investing in a prudent way."

The fund could make sense for GCC investors looking for an uncorrelated investment in a high growth area, especially since they are unlikely to have much previous exposure to the region.

"This is the kind of opportunity that you don't really get too often," says Yousuf. She compares the situation to market like Brazil in 2002. Early investors made big returns, but the market later decided that risk premiums were too high, and they swiftly declined.

Sub-Saharan Africa is still an imperfect, largely undiscovered market. "It's really the last frontier investment market out there," she says.