Poor Market Infrastructure Hampering Africa’s Appeal to Investors

(January 24, 2012) — Poor capital market infrastructure and limited liquidity in African companies are larger concerns for institutional investors already investing in the continent than fears about bribery and corruption, a survey by Middle Eastern investment asset manager Invest AD along with the Economist Intelligence Unit has found.

Invest AD said that although investors who did not allocate to the region were mostly concerned about perceived problems with bribery and corruption, those who already invested in the continent considered it a lesser problem.

Only a third of investors already allocating funds to Africa considered bribery and corruption as the major obstacle to accessing companies in the region, compared to 64% of those not yet invested there.

Across the board, illiquidity in African markets was cited as the third biggest hurdle to investors, beating concerns over political risk.

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Robert Mitchell, Contributing Editor at the Economist Intelligence Unit, which co-authored the survey, said: “Investors already in Africa are more worried about a lack of liquidity, trade execution by institutions in the region, and the local regulatory environment than the perceived risk of corruption, which is the main concern to investors new to the region.”

Mitchell said better cooperation and integration between exchanges on the continent would help open up markets to new investors, who were growing ever-more confident about Africa. The survey showed that institutional investors were keener on Africa than any other frontier market.

Furthermore, of the 158 investors surveyed in August and September last year, 21% had no current exposure to Africa, but only 1% said they would remain outside of the content in three years’ time. By the end of 2016, every investor said they would have entered the continent, with over a third saying they would have allocated more than 5% of their total assets to African companies and projects.

Mohammed Al Hashemi, Head of Asset Management at Invest AD, said: “Technically, these markets are still some time away from European standards, but they are progressing more quickly than people think.”

Al Hashemi said African market participants and regulators were willing to learn and adopt practices that had been implemented elsewhere, including other frontier and emerging markets, that had followed the same path.

He said: “In this case, history does repeat itself and they can overlay the benefit of hindsight.”

The survey was conducted with institutional asset owners with assets ranging from multi-million dollar to multi-billion dollar portfolios.

UCITS funds have found little favour with institutional investors despite a wave of them being created in reaction to the financial crisis and Madoff scandal.

(January 23, 2012) — UCITS funds and other highly regulated investment vehicles that were launched by hedge fund firms in answer to institutional investors’ demands for transparency have failed to tap into this target market, a study has shown.

Only 15% of institutional investors responding to a survey by SEI’s Investment Manager Services and Greenwich Associates said they planned to direct part of their current hedge fund allocations to a registered product such as a mutual fund or UCITS vehicle.

Only one institution with assets greater than $5 billion reported plans to shift hedge fund assets to registered products.

The SEI IMS survey reported: “The results suggest that even though institutional investors strongly desire the kind of transparency and liquidity that registered products can provide, they may be unwilling to give up the advantages that hedge fund limited partnerships offer — namely a greater range of unique strategies and the incentive that performance fees provide.”

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SEI IMS added that the cost or constraints associated with redemption of existing hedge fund investments, as well as the potentially higher asset-based fees for regulated products, may also have influenced investors’ responses.

UCITS funds had originally been designed for less sophisticated investors, such as those buying retail or mutual funds, but in the fallout of the financial crisis and the Bernard Madoff scandal, hedge fund managers began to create them to target larger clients.

The highly regulated structure meant investment pools were highly liquid, transparent, and only able to hold certain types of securities.

Of the 15% of investors that would shift into these regulated structures, liquidity was cited as a top priority by over 90%. During the financial crisis, many hedge fund managers implemented ‘gates’ on their asset pools meaning investors could not withdraw their money. This was usually due to the illiquid nature of the fund’s investments and managers avoiding unwinding positions quickly and making a great loss.

These 15% of investors were mainly at the smaller end of the scale, SEI IMS said.

“Those most likely to [move to these highly regulated structures] are smaller institutions that have less clout to demand greater transparency and liquidity and may not qualify for the minimum investment required by an unregistered hedge fund product,” the survey reported.

SEI IMS questioned 105 institutional investors. Endowments accounted for more than a third of all survey respondents whereas foundations represented just over 17%. Family offices, corporate funds, and public pension funds each accounted for another 12%. The remaining responses came from consultants, union plans, and non-profit organisations.

Participating organisations ranged in size from less than $500 million to more than $20 billion in assets. Approximately 85% of respondents were based in the United States with the rest based in the United Kingdom, Canada, and Scandinavia.