Africa: The big deal

Banking & Finance
| The European | 9th May 2015
Sonnie Ayere, Founder and Group Managing Director, Dunn Loren Merrifield

Sonnie Ayere, Founder and Group Managing Director, Dunn Loren Merrifield

The continent of Africa offers a myriad of opportunities to investors who reap in most cases, a better return than they would from the other BRIC countries. However, only about 0.3 per cent of the average portfolio in the United States, for example, is invested in Africa. This may be attributed to low investor confidence in the continent. Sonnie Ayere, Group Managing Director of full-service investment house, Dunn Loren Merrifield, offers a different view. Investors need to look at the track record of portfolios that have invested into the continent over the years. Africa’s “inverted triangle” as he describes it provides the biggest opportunity within Sub-Saharan Africa. These are Nigeria, Kenya and South Africa. Mr Ayere admits that fixed income portfolios have done circa 5-7 per cent in dollar returns with no delinquencies or defaults and listed equity portfolios recorded circa 15-25 per cent or higher also in dollar returns in recent years. Prior to the Nigerian naira’s recent devaluation in 2015, investors received 13-15 per cent per annum from Nigerian sovereign bonds in dollar terms between 2011 and 2014. Nevertheless, the bulk of foreign portfolio investors got the returns out before the loss in currency value.

Mr Ayere is positive when asked about impending risks: “Yes, there are risks but the trick is to work with trusted people or institutions on the ground in the continent. The same approach, i.e working with trusted partners, is applicable to FDIs”. In recent times, global firms or investors that have been able to obtain quality guidance regarding the domestic markets, and have actually increased their respective investment portfolios in Africa – and indeed Nigeria. He identifies such examples to include, Lafarg, the second largest cement producer in the world which is expanding aggressively in Nigeria, General Electric and Atlas Mara, Bob Diamond’s venture capital company, which increased its stake in a Nigerian bank from 9 per cent to 21 per cent in September 2014.


Currently, Nigeria is Africa’s biggest economy with the middle class population having grown by approximately 600 per cent between 2000 and 2014. Mr Ayere thinks the growth offers diverse opportunities to foreign investors. The real estate sector, he explains, is also where there will be tremendous growth over the next ten years. “Cantor Fitzgerald just agreed to invest US$ 1bn into the real estate sector in Nigeria. “That will be the first of many to come. At present, Nigeria has a massive housing deficit and desperately requires affordable homes. To address this significant shortfall, it is estimated that the country must provide around one million homes per annum over the next decade and beyond. Whilst this may appear to be an uphill task, the good thing is that all stakeholders agree that this is a major developmental activity that must occur and an enabling environment is being established, with funding and the right legal backing. Therein lies the opportunity. This is the same situation in other sectors such as power, infrastructure, mining and agriculture”. He says that it would be great to see the Nigerian government commence the issuance of dedicated infrastructure bonds under a sovereign guarantee programme. This could make sense given the low debt-GDP ratio and non-requirement of actual cash funding by the government.

Mr Ayere is keen to point out that although the opportunities of investing in Africa may appear appetising, there are, however, underlying challenges. First and foremost is the challenge of political uncertainty followed by policy inconsistencies as opposed to incremental policies within the same trajectory. Weaker regulatory environment, protracted judicial systems and the attendant effects of these on the broad economy are other challenges. In addition, businesses in many African countries are also beleaguered with otherwise unnecessary bureaucratic processes, this refers to poor and soft infrastructure. Mr Ayere says: “What actually prevails elsewhere is the less red tape a country has, the less an investor has challenges to invest in a country. However, a few African countries are beginning to make headway on this challenge in some sectors. Take Nigeria for example, where the hitherto arduous distribution of fertiliser to farmers by the government has been eradicated by the current administration thereby paving the way for higher output within the sector.”

Various sectors in Africa are also expected to experience higher growth than those of other countries. The International Monetary Fund (IMF) estimates that the GDP of Sub-Saharan Africa as a whole will grow by 5.8 per cent in 2015, albeit lower than previously estimated. In no particular order, Mr Ayere mentions agriculture, housing – retail & commercial, mining, oil and gas, telecoms, banking, retail & wholesale trade, entertainment industry (music and film) and other key industries among those that will play an important role in the continent’s development going forward. “I believe investors interested in Africa should critically look at these areas as possible avenues into which they may spread their frontier-market portfolios.”

With China currently leading as Africa’s biggest trading partner, Mr Ayere measures this interest as an indicator that should attract other economies, such as the European and American to the continent. “What does China see that others don’t?” he asks. We wonder if it could be the natural resources?

“Yes, to a certain extent, especially crude oil. But, more importantly from Africa’s perspective, it’s becoming about building infrastructural development for oil etc. A better enabling environment for investment would certainly make the continent more attractive to others, but let’s also think outside the box for a moment. Could it be possible to have one country take “an agreed duration equity stake” in another?” He further illustrates his point: “For example, the UK takes a stake in Nigeria that allows for a revenue sharing formula that gives the UK the opportunity to all infrastructure hard and soft contracts from Nigeria. This means major knowledge transfer to Nigeria, but job creation for both countries, faster development for Nigeria or the incumbent country and ultimately increased revenues to both.”

Momentarily, this may be an abstract idea, but if a private equity company can take a stake in a company, bring expertise, investment and grow the company by 10–1000 times why not so for a sovereign? The legal nuisances will be different but Mr Ayere believes it’s an idea that can be considered and built upon. Beyond this, African nations collectively may equally seek to improve on building institutions – not individuals, reducing corruption and improving on human rights, particularly those of women and children.

Introducing innovative products and services are equally essential to recording success on investments. As Mr Ayere puts it: “Innovation will continue to pave way for growing businesses in Africa.” With his investment banking firm, Dunn Loren Merrifield Group established since 2009 setting trajectory and achieving milestones in Africa, Mr Ayere is optimistic the bond issuance programme by Nigeria Mortgage Refinance Company (NMRC) for instance, will be a delight to investors. The programme will be local currency (Naira) denominated bonds guaranteed by the sovereign and meant to support the growth of the housing sector in Nigeria. The growth of the housing sector is expected to launch into billions of US$ in due course.

The continent is definitely ready to welcome new investments to the horizon.

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