Why Africa Is Having a Moment | Chief Investment Officer

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While South Africa is struggling with its commodity and foreign development-led economy stalling, an unexpected story is emerging: Sub-Saharan Africa is starting to attract institutional money.

As with many new institutional investment ideas, it’s the Danish leading the way. Old Mutual Asset Management, one of the key players in this space, told journalists that the Danes were supportive of African funds because they are more sophisticated in how they treat illiquidity premia.

They are also less reliant on consultants—typically a big stumbling block for African fund managers seeking investment from institutions.

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Danish pension Danica is one of several funds investing in listed equity funds. CIO Peter Lindegaard tells aiCIO it is early days for his fund, and the size of his stake is still small.

Small stakes are not uncommon. Another Danish CIO, who asks to remain anonymous, says his fund had made a limited number of commitments to African managers in the past, and that it is unusual for funds to raise more than $500 million at a time, limiting some of the bigger players’ involvement in the region.

Where the Danes lead, the UK and the US are beginning to follow. aiCIO discovered one of the largest corporate pension funds in the UK has been using an African equity manager “for a few years.”

Again asking to remain anonymous, an investment chief at the fund says he currently has a watching brief on private equity in Africa, but laments the difficulty of negotiating deals to take majority ownership of African companies.

“There are problems around liquidity outside the major markets in Africa, and the Arab Spring has created issues in further reducing the size of the potential universe,” he says. “Because of liquidity issues, public equity managers may be permitted to hold private/pre-IPO issues. On the private side, there are a few managers with track records, but they tend to be in the major markets, such as South Africa and Nigeria.”

Another major UK pension fund, the Pension Protection Fund, is currently investigating African investments for the first time.

CIO Barry Kenneth has met with several managers, and discussions are being held internally about how best to get money into Africa.

“Frontiers are an asset class that I’m not convinced we invest in in the best way at the moment,” he says. “We’ve seen a couple of people about it, but there are no conclusions yet. We need to think about the asset allocation as it evolves over the next 15 years or so. You can’t ignore the frontier area—people need to spend more time understanding these areas.”

As for the US, having traditionally been a region that has remained cold to African investment—scared of the impact of political risk, illiquidity, and corruption potential—now endowments and foundations are beginning to take managers’ calls.

Walé Adeosun, a former CIO for the Rensselaer Polytechnic Institute in Albany, is the founder and CIO of Kuramo Capital in New York. He says endowments are attracted to the “excellent risk-adjusted returns offered by capturing the tremendous sub-Saharan Africa growth opportunity.”

Risk perception is still the biggest stumbling block for investors, Adeosun continues, but with more education on the region, this could subside.

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If a printed word is looked at steadily for some little time, it will be found to take on a curiously strange and foreign aspect. This loss of familiarity in its appearance sometimes makes it look like a word in another language, sometimes proceeds further until the word is a mere collection of letters, and occasionally reaches the extreme where the letters themselves look like meaningless marks on the paper.” —Severance and Washburn, 1907

It’s called semantic satiation, and it’s happening in asset management. The offending word?

“Solutions.”

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(I’m putting the word in quotations because I can’t bring myself to use it with a straight face, which removing the quotations would imply.)

I’ve disliked the word since we founded this magazine nearly five years ago. What may have at one point been a helpful differentiator from “products” has transformed into a meaningless marketing phrase. When everything is a “solution,” nothing is—and so it’s high time to change the language.

But what about truly customized “solutions” like liability-driven investing (LDI), you say? I will grant that there might actually be a one-size-fits-one relationship out there, and LDI might be it. However, the overuse of “solution” to describe not just this, but every transaction between asset owner and manager, has so degraded the word as to make it useless—even in this context.

Does a word actually matter? Yes. The role of language is to clarify, not confuse. The responsibilities of allocators are burdensome enough without having to search through a jungle of rhetoric. A solution is a problem solved; as Managing Editor Leanna Orr asserts, “If all these products were really ‘solutions’, investors would have no more problems.” No asset owner who buys a “solution” would claim freedom from problems.

Sanity does exist in some corners of the asset management-industrial complex. I heard recently of one fixed-income shop that has stopped using the term because their compliance department asserted that “solution” implies a singular answer to a problem, which is itself a problematic legal claim. This compliance group is always welcome to drink on my tab.

I challenge firms to follow this manager’s lead and drop the use of “solutions” entirely. Let us call a spade a spade: Few things in asset management are truly unique, and uniqueness is required for anything to approach S-word status. Let’s default back to “product” unless you have literally never sold, nor will ever sell, the same arrangement (or anything approximating it) to another client.

Is this a semantic rant? Yes. Are there more important issues in asset management? Certainly. But let’s start with the abandonment of “solutions” from our vocabulary—only when we start talking about what products actually do, and not how marketers want us to perceive them, can we address the more pressing concerns of this industry.