With talk of another chapter in the financial crisis unfolding, institutional investors are wise to explore their options, diversify and avoid a head-on 2008-style crash. Where can they go with their investments? Pension Funds Insider explores one relatively untouched option – Africa 

"Despite widespread Afro-pessimism I remain unapologetic about the prospects for the 'dark continent'. The negative perception of Africa – shaped by images of poverty, famine and conflict – has kept the region off the radar screen of many western investors. But the conventional view is not matched by my experience on the ground. To me, Africa is a classic example of the gap between perception and reality which leads to investment opportunity."

With this statement Nick Price, emerging markets portfolio manager at Fidelity, sums up how many investors feel about Africa as a continent. However, attitudes may be changing.

Africa is a relatively untouched continent where opportunities are thick on the ground. It consists of 53 countries and combined their land mass is bigger than the combined land mass of the US, China, India, Argentina and Europe.

And it is not all unproductive dry land. According to information provided by independent financial consultancy the deVere Group, Africa holds many of the world's resources, including 89% of its platinum group metals, 74% of its chrome, 60% of its diamonds and 12% of proven oil reserves.

On top of this, there is a huge agricultural market, as Gary Vaughan-Smith, chief investment officer and founding partner of SilverStreet Capital, explains. And he should know, his company manages a fund that invests in precisely this sector on the continent. "It is definitely one of the long-term opportunities there, "he says. "You have the natural environment in Africa that gives possibilities; it is the perfect climate, you can grow double crops, so all year long you make use of the land. All in all this ensures that you can get very high yields from your land."

What's more, the African trading market is set to grow, if former emerging markets continue their path of growth. By 2030, deVere says, Brazil, Russia, India and China (the BRICs) are all forecast to be in the top eight global economies. Trade between the BRICs and Africa is by then expected to reach US$4 trillion a year, roughly half of the continent's total trade.

With Africa being a growing, dynamic continent, and surprising areas of business expansion have already taken place. For example, African telecoms are the fastest growing telecommunications sector in the world, according to studies conducted by Ernst & Young. Between 2002 and 2007, the industry grew by 49.3 percent as opposed to Asia which recorded a 27.4 percent growth.

And Africa is home to approximately 1bn people with the region boasting the world's youngest population. Under-25s account for 60% of the total population. For reference, under-25s account for only 30% in developed countries.

It has also proven itself to be a fairly stable market, being one of the few ones that were unaffected by the 2008-2009 recession.

"One of the least-remarked aspects of the financial crisis was the relative resilience of Africa to the global economic downturn," says Price. "Economic growth in sub-Saharan Africa remained above that of the advanced economies before, during and after the crisis. Limited integration into the global economy may have helped but as important were the strong fundamentals of many countries – with their low national debts and lower inflation than in the past."

"With the current economic events unfolding in Europe it is definitely important that investors look elsewhere and Africa is a good market," says Vaughan-Smith.

Cash, not credit

Another positive for the continent in terms of investment outlooks is what Price calls "the cash-based nature of Africa's economy". He says it has "profound implications" for assessing real demand in the region.

"When the credit crisis hit the western world, we quickly discovered that some of the demand was illusory as earlier spending had been funded by credit that should never have been granted. In Africa, the demand numbers stand up far better to scrutiny because there is practically no personal credit."

The continent will see an estimated 221 million consumers enter the market by 2015 and according to the UN, GDP per capita for the region as a whole doubled since 2002 to over $1,500 in 2008, and it has the potential to double again by 2013.

"Consumer goods, simple basics such as baby foods and diapers for example, will be increasingly in demand with a consumer group that is growing so incredibly fast. Investors have to spot the opportunities," says Vaughan-Smith.

Andrew Brown, chief investment officer at Emerging Capital Partners, an African private equity specialist, says it is important to realise that Africa is not one entity. It appears to be one of the common mistakes investors make. "There are different opportunities in different regions and it is important to acknowledge that and deconstruct the market for your benefit."

A fear of corruption is another off-putting pessimistic fact that fund managers active on the continent have to deal with. In terms of governance, Brown says it is not always straightforward. "We do invest a lot to ensure it but we see positive developments in this field. The structure is often already there but it is the technical side that we need to check – that things are really being done as we like them to be done." However, with an office on the ground Brown shows that it is possible to have that much asked for good governance as well.

"I think we are clearly seeing an increased interest from the investing community. Africa is slowly trying to resonate with people," Brown says. "We are a third generation fund so you can analyse the results in exactly the same way as a pension fund would analyse any other private equity group which they would consider putting their money into. You can go through the track records now, which is very comforting for investors."

Emerging Capital Partners is not the only one, more investment funds are in their next stage with records that can proof their achievements. It is up to pension schemes however, to discover its real gems.

First published 13.07.2011

azeevalkink@wilmington.co.uk