Super fund lands
Tuesday, 01 July 2008
In recent years government-controlled funds from the Gulf, China and Singapore have snapped up everything from faltering Wall Street banks hit by the credit crunch to stock exchanges and some of the best-known global brands.
Morgan Stanley puts the vast wealth of these sovereign funds garnered from oil revenues and foreign exchange reserves at between US $2 trillion and $3 trillion, and growing. The total pool could reach $12trn by 2015.
Now the World Bank is urging these 29-odd sovereign wealth funds to invest in Africa too. Its private sector lending arm the International Finance Corporation (IFC) is considering a "fund of funds" to help channel sovereign wealth into African businesses such as agricultural processing and manufacturing. It's considering a solution where sovereign funds invest 1% of their assets in equity in Africa.
"If the World Bank Group can help create the platforms and benchmarks for the investment of even 1% of their [wealth funds’] assets it would draw $30 billion to African growth, development and opportunity," says World Bank President Robert Zoellick.
Flush with cash, wealth funds could be a huge source of investment in Africa’s dynamic emerging markets. Is Africa going to get the sovereign wealth treatment?
"There is a wall of money coming in," says Jeff Gable, head of research at Absa Capital, the investment banking division of Absa Bank. "The same things that makes Africa attractive to all the big funds is making it attractive to these sovereign funds - the market isn’t crowded and the returns are significant."
London-based Ashmore Investment Management is among the emerging market specialists, with $19bn under management, 13% of which is managed on behalf of either Central Banks - increasingly keen to make better returns on the public wealth they manage too - or sovereign funds.
"Wealth funds haven’t quite got to Africa yet but they will," says Jerome Booth, Ashmore’s head of research. "There’s no quick answer because they have to feel comfortable and that takes time, but when they invest they’ll start with conservative assets such as foreign debt, local currency and sovereign emerging debt."
Testing the market
Signs that suggest these funds are already dipping their toes in to Africa include Arab investor interest in the recent swathe of north African IPOs. A record 20 Moroccan companies have issued shares in the last two years and analysts expect 50 more Tunisian companies to float in the next five years. Agricultural conglomerate Poulina Holding’s imminent $1bn share issue is blazing a trail in big Tunisian IPOs.
"There has been a lot of interest from Arab investors in north Africa’s very well subscribed IPOs, including Libya’s wealth fund, which is wanting to boost its influence in the region," says Citigroup’s Africa economist David Cowan.
Private equity is another asset class starting to attract interest from these super funds, says Panos Voutyritsas at Kingdom Zephyr Africa Management, a private equity fund seeded by Saudi Arabian billionaire Prince Alwaleed bin Talal. Although private equity outside South Africa has only been going since 2002, and wealth funds look for players with a track record, the interest is clear.
"We’re confident it will happen as private equity specialists in Africa show a consistency of returns and build strong teams," says Voutyritsas. "Sovereign funds have piled into private equity in the West attracted by its long-term investment, boardroom control, privacy and high returns. The China Investment Corporation, set up to manage China’s vast forex reserves, bought a $3bn stake in US private equity group Blackstone. Similarly, Abu Dhabi’s wealth fund Mubadala Development invested $1.35bn in private equity giant Carlyle Group. The Nigerian government, nurturing plans to invest crude oil earnings in its own sovereign wealth fund, has also invested in private equity (see box). It has ploughed $462m into the African Finance Corporation, a private equity fund focused on Africa.
The Abu Dhabi Investment Authority, the biggest fund in the world, estimated at $875bn, appears eager to spend its petrodollars in Africa too. Few outsiders know for sure where it invests, but its subsidiary, Mubadala Development, set up in October 2002, has invested $400m in Nigeria’s telecoms sector, buying a licence to offer mobile, fixed-line and broadband services. It’s also invested in power stations and oil and gas projects in Algeria, and Guinea’s aluminium industry.
Other sovereign investments have attracted more publicity. The Industrial and Commercial Bank of China’s purchase of a 20% stake in Standard Bank - South Africa’s biggest - for $5.6bn last year was the largest single foreign direct investment in South Africa to date. Critics call this "pseudo-sovereign wealth", but given that every major multinational is state-controlled in China, these companies’ funds and investments can also count as sovereign funds. Wealth funds have started talking publicly of investing more in emerging markets too. As the chief of the Kuwait Investment Authority said: "Why invest in 2% growth economies when you can invest in 8% growth economies?"
As with all other big funds, sovereign funds are also encouraged by improved monetary policy and good governance, says Michael Kafe from Morgan Stanley in South Africa. He says Ghana’s introduction of inflation targeting in May 2007 is just the kind of policy to attract sovereign investors.
"Ghana’s the only country doing this apart from South Africa," he says. "It’s a policy that will encourage these kinds of investors who want stable prices."
But sovereign funds in Africa are limited by the size of the investment they can make. The lack of liquidity on Africa’s still small exchanges makes big investments tricky: "Most of the transactions outside South Africa are still too small," says Mark Tunmer at investment banking and asset management group Imara Holdings. "It’s a question of finding something large enough that they would be interested in."
As in the West, sovereign funds have also attracted criticism for their investments in Africa - like China’s snapping up of sought-after strategic commodity resources. Other critics say wealth funds are detracting from rich countries’ slipping commitment to increase aid flows to Africa.
What of oil and commodity-rich African countries’ own nascent sovereign wealth funds? Estimates value Libya’s Oil Reserve Fund at $50bn and Botswana’s Pula Fund, based on diamond revenues, at $4.7bn.
Other countries are nurturing investment funds of their own too. Central Bank governor Chukwuma Soludo recently outlined plans for a Nigerian fund to manage its crude oil earnings (see box, previous page). Over the last four years, Nigeria has generated $60bn in foreign exchange reserves and about $38bn in savings, of which $17bn was used to buy back external debt, $3bn was spent on power sector investments and the remaining $18bn has been saved.
Ghana, like Nigeria, is also hotly tipped to create its own sovereign fund to manage the recent crude oil discovery off its coast, roughly valued at six to eight times the country’s annual GDP forecast at $15.5bn in 2008.
"Ghana won’t be producing oil until 2010 but it’s already preparing the ground for managing its vast forecasted revenue," says Michael Hugman, emerging markets strategist at Standard Bank in Lagos. "They’re getting support from the Norwegians and Canadians in setting up a fund. They appear committed to learning from those challenges Nigeria faced managing its own oil revenue over the years."
To date, Angola, Gabon, Equatorial Guinea and Chad have not built up significant long-term savings from their oil exports, despite record oil prices and exports averaging 150,000-250,000 barrels a day. Angola produces 1.9 million barrels a day.
African governments’ own burgeoning investment pools amount to a whole new line of funding, separate from aid or borrowed money, and lend political clout on the international stage. It’s just the type of good governance that will lure more sovereign wealth funds to invest in Africa.