In the early 2000s, Paul Boynton would feel very lonely at conferences.
“The first private equity conference I attended internationally was in Berlin,” says the co-CEO of Old Mutual Alternative Investments (OMAI), Africa’s largest alternatives manager. “I was on the panel for a breakaway session focused on Africa, and there were more people on the panel than in the audience. For someone who comes from Africa [Boynton is a South African native], it was a very chilling experience to find so little interest in what’s going on where you come from.
“But that’s a very different story today. Now there’s a lot of interest.”
OMAI is part of Old Mutual, a major insurance company headquartered in Cape Town, managing $70bn across Africa. OMAI, which Boynton built from scratch starting in 2004, manages $3.4bn and seeks to generate 20% gross, dollar-denominated returns. Its portfolio spans infrastructure, private equity, fund of funds and impact investment.
“There are not many people writing big cheques in Africa,” he says, but changes in demographics, growth projections, the region’s strong resources, and ongoing work to strengthen institutional governance and frameworks are powerful forces for change. “There’s a lot of interest now. There's an expectation that Africa could be approaching an inflection point, like we've seen in Asia – where you actually reach combustible ignition.”
Investors are starting to prepare for this shift, he observes. “Some of them are putting a toe in the water and putting capital in early; some are still at the conversation stage and not yet committing. But certainly one feels that this is a river moving downhill in a very inexorable way.”
But could Covid-19 and its fallout stop this progress? The UN says declining foreign direct investment in Africa is set to accelerate significantly in the face of the dual shock of coronavirus and low commodity prices, especially oil. It predicts investment flows in the continent will fall between 25% and 40% by the end of 2020.
‘It was a very chilling experience to find so little interest in what’s going on where you come from. But that’s a very different story today’ – Paul Boynton, Old Mutual Alternative Investments
Capital flight from Africa in times of economic stress aren’t unusual, and present challenges for long-term investors in the region – especially when it comes to liquidity.
“One of the key issues for us when making an investment is our ability to expatriate capital,” explains Boynton. “Can I get my money out when I want to? How liquid is the market for me to change the local currency back into dollars? Exchange rate risk is a big risk that needs to be carefully managed.”
But, he says, private equity has an important role to play in providing stability, because its longer-term nature means investors “are not out at the first sign of trouble”.
“You sit on boards and are intimately involved in company strategy, which is a very powerful way to take advantage of opportunity in Africa.”
He also points to the African Continental Free Trade Agreement, currently being negotiated, which he says could be a game-changer. It looks set to eliminate tariffs on 90% of goods, while incrementally applying the same to services, in a move that is projected to increase the value of intra-African trade by 15-25% by 2040, or between $50bn and $70bn.
“One of Africa’s problems is sub-scale economies that are not joined up, so in five to 10 years, I think you're going to see an enormous positive impact from the trade agreement,” says Boynton.
But it will also be essential to reduce the risk premium in Africa if capital is going to flow into its development.
“We’ve found the ex-post assessment of risk in Africa is quite modest, but if you look at what people are charging around risk to go into Africa, it’s up here,” observes Boynton. “So we're trying to help narrow that gap over time to get more capital available into Africa set on less onerous terms.”
Development banks and countries are using blended finance – where public or philanthropic capital is used to de-risk private investments- in order to attract more capital to Africa.
Boynton says OMAI has been involved in blended finance transactions, the best example of which is a renewable energy programme in South Africa led by the government, where developers invested ‘sweat capital’ (labour in lieu of financial investment) alongside private investors.
“The key thing was a standard and robust set of documents – so the power purchase agreements, that framework set in place with a utility up front, was really going to be done,” he explains. “And then you had this repeatable opportunity to build projects under the tender process. And if you were sufficiently competitive on price, you came in with a price point bid and in some cases the price drove down by 75 to 80%. That was just remarkably well driven.
“We need to be doing that across Africa, understanding these spaces that can be developed using private sector capital and then putting in place the very solid programmes to get capital in at the right price and competitively.”