Doing Great Things Means Going Beyond Returns
Paul Boynton, Chief Executive Officer, Old Mutual Alternative Investments
IN A NUTSHELL
- Good investment returns and creating a more sustainable future are not mutually exclusive.
- For African development to be sustainable, it must benefit investors and communities over the long run.
- Disciplined investment processes and experienced, passionate teams are essential to deliver both financial and social returns in Africa.
- An understanding of environmental, social and governance issues is integral to assessing the long-term risks and opportunities associated with alternative assets.
The Africa investment story is often characterised by the promise of untapped opportunity in a vast continent that is set to play a central role in future global growth. But, what does this mean, and what is needed in order to unlock this potential to the mutual benefit of the investor, the African community and the environment?
The story
Our investment thesis for Africa is based on the synergy of attractive natural resources, a growing and an increasingly urbanized population, and an improving trend of governance practices at a sovereign level.
Mineral resources
Commodities are an abiding aspect of the global economy and it is estimated that around 30% of the global mineral resource endowment sits in Africa. To access this nascent value requires the development of economic and social infrastructure, as well as positive sentiment in the global investor community.
Food security
This is a pressing issue in an increasingly pressurised environment, and it is estimated that Africa has close to 60% of the world’s uncultivated arable land. This is significant on many levels, not
least of which is cultivating this opportunity in a manner that ensures long-term, sustainable yields, not only in terms of produce, but also with respect to social and financial benefits.
Demographics
A much-cited indicator of Africa’s attraction as the global epicenter for economic potential is its attractive demographics. The global population will increase from seven to nine billion by 2050. Of this growth of two billion people, one billion will be born in Africa. The working age population in Africa will exceed that of both India and China by 2035.
Improving governance
The increase in adherence to the democratic process and transparent governance practices over the last three decades cannot be ignored. Prior to 1990, Africa had only experienced one democratic change of government. Since then, we have seen this happen on over 40 occasions, with the most recent feather in the cap of African political transformation being demonstrated by peaceful handover of power by Goodluck Jonathan after his defeat at the polls in Nigeria’s 2015 elections. This is not lost on the international investor.
So what will it take?
Collectively, infrastructure, food security and the secondary economy present a compelling investment case. For example, it is estimated that elevating infrastructure investment to match the middle income needs in Kenya and Nigeria has the potential to add between 3% and 4% to their gross domestic product (GDP) growth rates1, respectively. And, as stated, we acknowledge that to access these opportunities requires a collaborative and mutually beneficial approach to ensure the socio-economic sustainability of the region.
In order for Africa’s potential to be realised, the massive infrastructure deficit needs a remedy – and rapidly, particularly given the current high rate of urbanisation. The World Bank estimates that there is an infrastructure development requirement of US$95 billion per year for 10 years – with a deficit of around US$50 billion that cannot be accommodated fiscally and, therefore, needs to be plugged through private sector innovation.
For this to happen, strong partnerships between private investors, government departments, financial institutions, industry-related experts and community leaders are central to developing innovative real asset solutions that deliver returns to investors and socioeconomic benefits to communities. Alongside this, a disciplined investment approach that considers environmental, social and governance (ESG) related risks and opportunities is critical due to the long-term nature of investing in alternative assets.
The investment case
Not only do real asset and private equity investments have a low correlation to traditional markets and therefore serve as important sources of alpha, but they are also an excellent diversifier and a hedge against listed market volatility. In addition, real assets have strong inflation protection characteristics with stable, projected cash flows, and these potentially higher returns compensate for lower liquidity. Each of our investment streams has dual outcomes – investment returns for our clients and developmental impact for the countries in which we operate.
Infrastructure
Investing in economic infrastructure has the social benefits of job creation and economic enablement – for example, currently, the costs of getting goods to port in Africa are triple the costs of those in the developed world. Better transport infrastructure would bring these costs down, to the benefit of everyone in the direct supply chain and, indirectly, beyond. Another example is Africa’s power-generating capacity, which is equivalent to that of Spain, a country with around 50 million people. Our investments in these assets should form strong inflation protection characteristics, with a projected real return of 7% a year, plus stable, projected cash flows, which are well aligned with the mandates of pension funds.
Impact investments Investors in these funds are far-sighted in that they appreciate the impact that housing and education development have on the health of the broader economy and, thus, the value of their overall investment portfolio. After all, every new house is likely, at some point, to generate the sale of a refrigerator, TV, furniture etc.
So while these investments admittedly do carry a burden of low liquidity, it is important to note that this is not a return risk, and that a new house implies retail growth and that an educated, salaried person has more demand stimulus to generate.
Private equity
Not for the faint-hearted, or the short-term investor, private equity is an investment arena of exciting potential, with a 3% – 4% return premium over listed markets over time. In emerging markets, private equity has a special role to play in growing more robust business, with all the accompanying social advantages and, ultimately, the expansion of the African listed universe.
Crucially, we have the backing of Old Mutual Investment Group’s professional services, such as compliance, legal and responsible investment teams. This places us at the forefront when it comes to identifying investment opportunities overlooked by others for a variety of reasons, such as high barriers to entry, out-of-favour industries and mispricing, amongst others.
Strategic alignment
Our investment activities are aligned with the South African (SA) Government’s National Development Plan (NDP), which is a comprehensive blueprint of our country’s infrastructure requirements, with an estimated spend of an impressive R847 billion over the next three years. However, even this staggering amount does not address the long-term infrastructure funding gap, which can’t be completely financed by government in the long term.
And this is where the power of public-private partnerships comes in. SA has established a solid framework for these as evidenced by our large-scale participation in the renewable energy project that has been provided by SA banks and financial institutions, including life insurers, infrastructure funds and pension funds. Old Mutual has been a significant player in terms of both debt and equity investments in this programme.
At Old Mutual Alternative Investments, we are seasoned real asset investors with a team of over 50 investment professionals. We have deep experience in originating investments and insight into how to add value to these investments over the long periods we tend to remain invested in them. Through our investments in infrastructure assets and development impact funds, we contribute to the development of vital socioeconomic infrastructure in a sustainable manner, while delivering long-term market-related returns for our investors.
And through our private equity investments, we help to grow the secondary economy through the robust development of private businesses. This ethos has helped us to position Old Mutual as the largest private alternative investment manager in Africa, with around US$5 billion (R51bn)* invested in socio-economic projects.
Our real asset experience to date in SA and the rest of sub-Saharan Africa is extensive and we believe that we are positioned to actualise the African opportunity in line with a country’s national development framework for the benefit of our customers and communities.
1 PWC: Capital Projects & Infrastructure in East Africa, Southern Africa &West Africa, 2014
