Investors’ Long Day’s Journey into Africa Investing Continues
The approximately $11 billion Chicago Teachers’ Pension Fund (CTPF) evidently was attentive and took careful notes as part of a delegation of investors that visited South Africa in the spring of 2017, and Senegal and South Africa one year later. The upshot: At its Jan.17 board meeting, the fund approved a $20 million allocation to two managers that will focus on African private equity, representing the fund’s inaugural allocation to the class and adding its name to a small coterie of U.S. institutions that are considering or have recently gained direct exposure to the PE investment class on the continent.
CTPF chose London-based Development Partners International (DPI) and Mauritius registered Advanced Finance & Investment Group (AFIG). Each manager was awarded $10 million, Chuck Burbridge, executive director, confirmed.
“The fund has been expanding its exposure to Private Equity in recent years to reach its target allocation of 5%. CTPF is currently running a search for MWDBE firms (Minority, Women and Persons with disabilities-owned business enterprises). CTPF also plans to launch a search for a venture capital fund-of-funds manager and perhaps an additional private equity MWDBE search later this year. These searches support CTPF’s private equity strategy of increasing our MWDBE firm exposure; increasing our direct investments to larger, experienced firms; and improved focusing of our fund-of-fund exposure by utilizing fund-of-funds in spaces where they have increased accessibility and experience”, according to CTPF CIO Angela Miller-May.
CTFC’s Africa PE Foray
The chronology of events leading to the fund’s first Africa PE allocation began in 2015, Burbridge said. “We’ve been participating with USAID [United States Agency for International Development] and the National Association of Securities Professionals [NASP] to educate ourselves and our members on investment opportunities in the PE class in Africa,” he said, explaining that the fund was first introduced to the opportunity at a June 2015 NASP summit in Chicago. (CTPF has attended the annual summit every year since; this year the meeting will be in Baltimore, June 23-26). “At the summit, the discussion grew; NASP then sponsored a trip with USAID to visit Africa and meet with pension funds and to gain a sense of the investment environment there. Finally, after three years of educating ourselves, we issued an Africa PE RFP last summer, which received 20-plus responses,” Burbridge said.
NASP is an organization that assists people of color and women achieve inclusion in the financial services industry. USAID is an international developmental agency. CTPF was part of the second delegation of U.S. investors organized by the NASP-USAID Investment Partnership for Mobilizing Institutional Investors to Develop Africa’s Infrastructure or MiDA. MiDA’s mandate is to expand opportunities for U.S. institutional investors seeking infrastructure investments in Sub-Saharan Africa (SSA) for commercial profit, while making a meaningful impact in the region.
Burbridge was accompanied by Miller-May on the first and second Africa fields (both are menders of NASP’s Africa Advisory Committee). The delegations included other U.S. state and city pension funds, namely from Illinois, New York, California, Philadelphia, San Francisco, Atlanta and Chicago, along with endowments and foundations, various banks and insurance companies, unions, consultants, investment managers and industry organizations, according to Miller-May. The fund’s two Africa tours were for eight days and 10 days, respectively.
“It is our belief that the growth opportunity identified in various African regions hold long-term potential for investments that will yield positive returns. We believe that the growth of the middle class, the growth of the working class, urbanization and modernization will act as growth catalyst making Africa a very attractive investment destination. We believe that the movement toward democracy in certain regions and the improvement of macroeconomic fundamentals further reduces the political risk and market instability. At a time when the population of various regions are aging and growth is slowing across the developed markets, we find emerging markets and Africa, in particular, attractive markets that can provide growth opportunities and increased return potential,” Miller-May explained in an email to IA.
CTPF opted to award mandates to DPI and AFIG because the principals at both firms have long track records of investing in Africa; they both have invested through cycles in Africa; and both firms have long runways with the current teams, according to Miller-May. “In all our private equity investments, we underwrite teams of people. We look for high character, ‘safe pair of hands’, cultural alignment in doing the right thing and a proven ability to outperform public markets,” she stated.
In addition, the AFIG Fund II co-investment vehicle affords CTPF exposure to lower middle market buyouts at a greatly reduced fee and visibility into existing investments,” Miller-May claimed. AFIG also targets financial services, consumer goods, agribusiness, light industrial and manufacturing–all sectors that will capitalize on Africa’s growth story, she observed.
The DPI Fund II partnership opportunity was chosen because it gives CTPF exposure to larger buyouts that are profitable or have cash-flow positive African companies with strong projected growth rates and experienced management. DPI targets industrials and logistics, consumer/retail, financial services, healthcare, natural resources and telecommunications.
“We expect that DPI will be a great complement to AFIG with both managers exposing CTPF to lower middle market and large market growth sectors in Africa. DPI also invests in a diversified Pan-African geography while AFIG focuses on nine core countries,” Miller-May explained.
Shooting bullets before cannon balls
Burbridge characterized the relatively small initial allocation into the class (it represents a mere 0.18% of the fund’s total assets) as “shooting bullets before cannon balls”, a reference to a book on management by Jim Collins and Morten Hansen titled Great by Choice: Uncertainty, Chaos, and Luck–Why Some Thrive Despite Them All. The book posits that foolish leaders look for big solutions, giant leaps, and dramatic success, while wise leaders take small steps before making giant leaps.
“This modest initial gambit will allow us to understand more the framework of these investments, the risks involved and the layers we’re dealing with,” Burbridge said. “This is not a throwaway investment by any means,” he emphasized, “but it’s not so large that we have to hit a home run. This allocation is as much about education as anything—it’s to test if we really know what we think we know.” He added that he hopes the investments, which he expects will run for approximately seven years, will generate a 15% return. The fund did not use a consultant for the allocation. Burbridge noted that all the fund’s PE transactions are researched in house.
CTPF’s current asset allocation targets are 30.5% Domestic Equity, 30.5% International Equity, 23% Fixed Income, 9% Real Estate, 2% Infrastructure and 5% Private Equity.
Other Investors Circle Africa
The City and County of San Francisco Employees Retirement System and the Seattle, Wash.-based Casey Family Foundation are two institutions that were part of the investors’ delegation that have already made investments in infrastructure in Sub Saharan Africa, after having attended MIDA trips, according to Aymeric Saha, a managing director at the NASP-USAID Investment Partnership who is responsible for the MiDA initiative (IA, 5/15/2018). He pointed also to a $180 million 2017 direct investment by Prudential in the African financial service sector and a $50 million 2017 investment in a South Africa housing fund by the Washington State Investment Board.
Saha noted that it is difficult to assess or quantify U.S. institutions’ appetite for Africa exposure because many investors are exposed to the class by virtue of their investments in emerging markets funds and indexes, which have historically delivered exposure to Africa in varying degrees. “For instance, Actis in London is one of the biggest EM funds (it recently raised $2.7 billion for its 4th energy fund. Typically, 50% of its investors are U.S. funds and one third of its expose is in Africa,” Aymeric observed.
“We are a $15 billion EM private equity fund; We’ve invested around US$4.5 billion in Africa since inception, so that is around one third of our exposure,” a spokesman for Actis confirmed, adding that around half the fund’s investors are U.S. institutions.
While the approximately $132 billion Washington State Investment Board (WSIB) does not now have any funds with a defined Africa focus in its PE portfolio, “we have recently visited Africa and intend to continue researching various economies there. That is the case with most emerging and frontier markets globally,” according to Chris Phillips, WSIB’s Director, Institutional Relations and Public Affairs. He added that WSIB is a member of the 20-20 Investment Association, a group of pension and asset management organizations interested in exploring the long-term capital market characteristics of frontier and emerging market.
“We participated in our first 20-20 Association trip to West Africa last fall (October 2018) in order to deepen our understanding of the economies and market conditions in Nigeria, Ghana, Cote d’Ivoire and Morocco. The trip was strictly exploratory for research purposes and did not involve investment commitments or specific prospects,” Philips said.
Regarding the value that the fund derived from the trip, he said: “We gained first-hand knowledge of the opportunities and challenges in these markets, personal contacts with business and government leaders, along with a better understanding of the partnership efforts necessary to develop successful long-term investment ventures.” He noted that the South Africa housing fund investment to which Aymeric referred may have been part of an internally managed emerging markets real estate fund-of-funds, which is no longer making new investments. He said he would need more details to be certain.