By Zeenat Moorad
As the lure of Africa's emerging economies grows among the world's institutional investors, a new study by The Economist Intelligence Unit on Thursday confirmed that foreign direct investment into the continent is set to rise exponentially in coming years.
Commissioned by Abu Dhabi government-owned Invest AD Asset Management, the study also revealed that more than half of institutional investors surveyed saw Africa as the most attractive region to invest in the next decade, with a third expecting to commit at least 5% of their portfolios to the continent by 2016.
Titled Into Africa: Institutional Investor Intentions by 2016, the study surveyed 158 institutions including pension funds, hedge funds and private banks.
Interestingly, almost half of the respondents have zero or minimal exposure in Africa currently, while nearly half of the investors said that they expected the best returns to come from energy, natural resources, agriculture and agribusiness, construction, real estate and financial services.
Additionally, private equity and infrastructure were expected to outpace commodities as the best asset classes for investment in Africa in the next three years.
"This study confirms our observations and predictions over the past five years, since we embarked on private equity investment in the affordable housing sector on behalf of global institutional investors in South Africa," said Soula Proxenos, managing partner of International Housing Solutions (IHS) and member of the Emerging Markets Private Equity Association (EMPEA) Africa council.
IHS, one of the pioneers in private equity investment in South Africa, recently reached the milestone of committing R1.1 billion in the development and construction of affordable housing in the country.
Proxenos, who was addressing an Emerging Market Private Equity Africa/SA Venture Capital conference in Sandton this week, said private equity investment in African projects was rapidly gaining the deserved recognition of being a valuable vehicle for investors to reap emerging market benefits.
"While the private equity industry globally is not yet well understood, the industry in Africa has emerged as a leading example of how investors can realise above-average returns while at the same time providing much-needed capital funding to developing nations," she noted.
According to Proxenos, this allowed for capitalisation of businesses and opportunities through equity instead of debt - providing a potentially significant developmental impact - while at the same time offering investors good risk-adjusted returns.
"In recent years, we have seen a clear trend developing as investor appetite for Africa grew. South Africa was considered the ideal launch zone for entry into sub-Saharan Africa. And according to research, over the past five years, investors are increasingly doing this through private equity funds," she added.
Proxenos concurs with the findings of the study, which note that the focus is no longer on commodities, grants and aid, but rather on investment in real economic growth drivers.
Finding from the study also show that urbanisation, greater consumer spend and the rise of a new middle class were among the notable factors that attracted new institutional investments while equity funding was the preferred vehicle to reduce investment risk.
However, while the appeal and prospects of investing in Africa were greater than ever before, Proxenos said that a few individuals or investors had the necessary knowledge and insight to be able to safely and confidently make direct investments into global markets, and this was especially so in the case of emerging markets such as in Africa.
"Private equity investment provides flexibility, shared exposure, some liquidity, professional management and an opportunity to select partners with a proven local track record in the chosen sector.
"In line with the report's findings, and should risk factors be contained, we expect in the next five to ten years to see an unprecedented influx of foreign institutional investment into South Africa and beyond," she said.
