Story of an African investment fund

To those of us of a certain age, one of the great disappointments of modern life is the behaviour of today’s rock stars.

When one is weened on the banner headlines and tabloid angst generated by the likes of the Sex Pistols or NWA, most modern musicians seem dispiritingly tame and eager to please.

So it is gratifying to see that old warhorse Bob Geldof stir up a hornets’ nest in the fund management world with a broadside at industry practices.

As FTfm reported last week, the former Boomtown Rat condemned asset managers for being willing to go through “endless hardships” to get into Asia while ignoring the “massive returns” available from his beloved Africa.

“With regard to Africa, the fund industry is criminally non-innovative,” he added for good measure.

Pleasingly, his comments generated an impassioned, and in places angry, response, both from readers of FT.com and other newspapers that picked up our lead. A personal favourite (fortunately not from an FT reader) was the delightfully grumpy: “I wish he’d invest in a decent haircut and some clean clothes before shutting the **** up”.

Others accused Mr Geldof of looking after number one by being a “self-promoter” merely “talking up his own interests”, given his position as a backer of an Africa-focused fund.

But many of the comments were a little more to the point, with readers queueing up to highlight the difficulties of investing in Africa.

Some concerns related to the political and economic backdrop. “Want to buy a South African gold mine? They’re all going to be Africanised. Want rich farmland in Zimbabwe? Better join Zanu [the governing party] first,” read one.

Others pointed to the relatively weak infrastructure, from roads to education, that holds back economies and profitable ventures, although Mr Geldof would doubtless argue there are opportunities for the fund industry to provide this very infrastructure. Poor-quality governance and judicial systems in some countries are harder for asset managers to solve.

However, the most commonly cited difficulty is simply that Africa, although large in both size and population, is not one universal entity but rather 54 disparate nations. And not many of these nations currently boast stock markets sufficiently large, diversified or liquid enough for the typical mutual fund, a point made by RisCura Fundamentals, a Cape Town-based consultancy, in the FTfm only last month.

Your correspondent is reminded of the salutary tale of the New Star Heart of Africa fund, which launched in a blaze of publicity in November 2007, only to collapse in ignominy in December 2008 when a combination of elections in Ghana and religious holidays in Nigeria was enough to critically undermine liquidity for a fund that had rashly promised its army of small investors a daily redemption window.

Sadly, the reality remains that, outside of South Africa, the continent’s public equity markets are not yet ripe for daily liquidity funds. Quite rightly, a number of less liquid Africa-focused equity funds have emerged, but a disappointingly large swath of investors are simply unwilling to touch anything that does not allow them to head for the exits at the drop of a hat.

There are of course other routes into Africa. RisCura argued the case for tapping into the continent’s nascent consumer sector via private equity.

Merger and acquisitions data due to be released today by law firm Freshfields Bruckhaus Deringer will show that inward investment into Africa has tripled in the past decade, from $6.4bn in 2003 to $20bn in 2012.

Importantly, Freshfields notes that consumer-facing industries are starting to rival natural resources as the prime hotspot for foreign investors, with interest in the healthcare sector also surging, admittedly from a very low base. With UK and French companies leading the investment boom (just ahead of the Chinese) this suggests the fund managers that largely own these companies are happy for them to seek out “massive returns” from Africa, and not just in the low-hanging fruit of the mining and energy sectors.

So is Mr Geldof correct in his assertion that asset managers are ignoring Africa?

To some degree this is evidently so. The industry, like all others, likes a “story” it can sell to customers. In recent years this has been “emerging markets” in the broadest sense. Given current weightings, this largely means Asia and resolutely does not mean Africa, excepting South Africa.

But the bottom line is the fund industry would heavily promote Africa or Antarctica, or Mars for that matter, if it thought this would lead to higher profits.

The real question is why so few end investors are clamouring to dip their toes into what will surely be the fastest-growing continent in the 21st century.