I’m sorry I’ve been off the grid. I was attending the Institutional Investor Africa Sovereign Funds Roundtable in Cape Town, and, honestly, I’ve been in nonstop conversation or note taking for the past three days. I found myself in deep conversations on a variety of different topics, such as: how to build an alternative investment portfolio in Africa; the appropriate governance structure for new SWFs on the continent; how to get the best from external managers; how should foreign funds think about accessing the African marketplace; and the ‘how, why and if’ associated with African institutional investors managing towards dual objectives (development and returns). Let’s just say it was a very thought provoking couple of days. All credit to Scott Kalb and the II team for putting on an awesome event.
Anyway, I can’t really get into too much detail. These events are completely off-the-record affairs (stricter even than the Chatham House Rule, which is perhaps necessary given the secrecy demands of the sovereign fund community). Notwithstanding, I’m still within my ethical rights to share with you some of the key lessons I took away from this trip:
1) Capabilities: There is an intense focus among African funds that they need to develop more in-house expertise. They want to deploy more capital on a direct basis and do a better job of holding their external managers accountable... both of which seemed wise.
2) Capacity: I was interested to learn that there simply are not enough external managers with credibility to soak up all the private equity and alternatives mandates that the African funds want to give out. In other words, what Africa may need right now are some good private equity shops.
3) Partnerships: Given the difficulties associated with developing internal capabilities and the lack of external managers with enough capacity to absorb the capital that’s looking to be deployed, many funds suggested that collaboration among them would be necessary to achieve their long-term objectives. In particular, soem suggested that these funds should (and some have been) seeding new managers that can go out and achieve their objectives.
4) Dual Mandate: Many of the African funds are expected to generate financial returns, while contributing to economic growth and development. As a governance wonk, I know all too well how hard it can be to mix and match objectives like this... it ain’t easy. But I was surprised (and impressed) with the thoughtful and rigorous approach by many of the funds in this domain. It’s almost as if the addition of extra-financial factors forced these funds to get their governance and process in good order.
5) Foreign Access: The natural inclination for many of the funds looking to Africa (both foreign and domestic) was to use layers of intermediaries (e.g., fund of funds) in order to minimize risk. But what was interesting to learn was that some funds found that the further you removed yourself from the underlying assets and / or managers through these diversifying intermediaries, the less you actually knew about your own portfolio... which meant your risks could actually be far greater than you know. In other words, you may think you’re reducing risk through a FoF when you’re actually increasing risk. Moreover, if you diversify too much, you’re paying alpha fees for beta returns.
Anyway, those were just a few of my high-level take aways from the meeting. Until next time... I’m off!
