With the economies of Sub-Saharan Africa on track to grow at over 5% next year, and with growth in South Africa languishing at around 2%, it doesn’t take a genius to figure out that smart money should be thinking about finding opportunities up north. However, venturing into Africa can be daunting for an investor, even a giant investor like South Africa’s Public Investment Corporation (PIC). In this interview, South African Venture Capital and Private Equity Association chief executive Erika van der Merwe talks about the risks and potential rewards of investing in the continent, and about how the SA government is trying to leverage its investment might, through the PIC, to spur growth and development in SA and beyond. – FD
To watch this CNBC Power Lunch video click here
ALEC HOGG: Our former colleague, Erika van der Merwe, is in the studio and she’s going to talk to us about what’s happening in Africa. We’re at a critical juncture in the continent on the development trajectory. There are growth projections of just under five percent in 2013, and acceleration to 5.3 percent. Some say six to seven percent is just around the corner. Erika is the Chief Executive of the South African Venture Capital and Private Equity Association, and has been doing a lot of work in this field. Just to go back a little bit Erika, your history that not too many people would know, is as an economist at Old Mutual and then you worked with us in the media industry and of course, you still present here on CNBC from time to time. Your day job however, is very much in the investment field.
ERIKA VAN DER MERWE:  Correct. It’s not my work that I’m doing, but our members’. I represent the private equity and capital industry in South Africa and our members are representing about 130 billion rand assets under management – about 90 fund managers in South Africa – many of them looking northwards of our borders, looking at the growth opportunities that you highlighted. Many of them are doing it in different ways: either sourcing/looking for those deals in West Africa, East Africa, elsewhere in Southern Africa, or encouraging their portfolio companies where they have significant board positions and strategic involvement, encouraging their portfolio companies to venture north and seek out those opportunities.
ALEC HOGG: As an economist… South Africa is growing at two percent, other parts of the continent growing at six percent, so it’s not a question.
ERIKA VAN DER MERWE:  We certainly need to leverage off that growth. We need the continent to be a success and I think the Government’s Employee Pension Fund – the largest pension fund in Africa… so our Government Pension Fund, having recognised that it’s part of their mandate to stimulate growth, infrastructure development, and social development across the continent with their investment mandate.
ALEC HOGG: You know it’s an interesting point. I picked it up the other day doing some work on the PIC. Do you know that the PIC manages the seventh biggest pension fund in the world, which is the South African Government Pension Fund? So when you talk about leveraging South African savings into the continent, there’s a lot of money there.
ERIKA VAN DER MERWE:Â Â Yes of course and as you probably know, the Government Employee Pension Funds, though the PIC that administers their mandate, have chosen to allocate up to five percent of their assets under management, to unlisted investments the bulk of which, will be private equity.
GUGULETHU MFUPHI:Â Just coming back to South Africa for a moment Erika, are there fundamental issues that maybe diminish the attractiveness of investment in SA?
ERIKA VAN DER MERWE:  Look, we all know that there are certain issues and concerns. We had a presentation this morning for our members and we had an economist from ABSA, highlighting the fact that asking CEO’s and those in control of making investment decisions what’s troubling them: it’s political uncertainty. We know these issues come and go and ahead of an election, this is going to be stirred up even more. I think the supply is across the globe, in developed markets, and in developing markets so it’s really a matter of encouraging our entrepreneurs – as they do – to work with what they have and to really emphasise the opportunities in our market and the way in which that moves across to the rest of the region.
ALEC HOGG: Isn’t it interesting that when we look at home, politics becomes a big thing, but if you look to the north, there are quite a few countries that have a far less stable political environment. Yet we don’t mind investing.
ERIKA VAN DER MERWE:  I think that what you’re alluding to, is probably the fact that growth opportunities in these frontier markets are higher. Perhaps investors with a higher risk appetite are prepared to accept those conditions, because the thinking is that the returns will be higher, so they’re matching the potential risk. Having said that, we know that there’s greater political stability in the region. We keep seeing those studies. Stability, property rights certainty – all of those things are falling into place for growth.
ALEC HOGG: Do you know that the Ghanaian President is in South Africa at the moment? There was quite a long list of South African companies investing in Ghana, which President Zuma rode out at his speech yesterday. Is that a particularly attractive opportunity for your members?
ERIKA VAN DER MERWE:  We’re certainly seeing that, so attraction in West Africa, Ghana as well as Nigeria, and then East Africa, Kenya, Tanzania, and Ethiopia. Those are therefore the hubs that we’re seeing. Certainly some of our members who haven’t done deals there in the last year or two are grabbing those opportunities.Â
GUGULETHU MFUPHI: Not only that, but I think the attitude you enter those markets, when investing in Africa…you need to tread carefully. You can’t go in there and be the Big Brother that tends to bully the other companies.
ERIKA VAN DER MERWE:  That’s right. We hear that over and over about working with local partners and understanding the local markets. I spoke to the CEO of the Eskom Pension and Provident Fund yesterday and he keeps saying, ‘you can’t in an office in Bryanston, make investment decisions across Africa. You need to be there.’ They, for instance, are launching an – on the ground research project to go and see what it’s like, so our members are doing the same. They go and work with local partners and do the deal sourcing locally.
ALEC HOGG: The risk returns roughly, if you compare it with a developed area: what kind of return would your members want from – take Ghana as a very stable country – and Zimbabwe as less?
ERIKA VAN DER MERWE:  It’s difficult to say when those expectations would come from the LPS’s – the limited partners – of the institutional investors into their funds. It seems as though – in the emerging markets – they’re looking for 20 to 25 percent returns, so there’s sort of uncertainty about the currency element there and an awareness of the uncertainty of these new frontier markets, so we’re looking at double digit returns.
ALEC HOGG:Â So investing in Africa generates 20 to 25% a year returns?
ERIKA VAN DER MERWE:  Yes, and they’re managing that. If you look at the South African returns, certainly over the last ten years, that’s what South African private equity has managed to deliver. If you look at an aggregate, of course, you have a distribution but an early to mid-20 percent in the IRO – internal rate of returns – they have been delivered over a ten-year period of time. Remember, this is a long-term asset class.
GUGULETHU MFUPHI:Â Just regarding the skills transfer side of things: do we see a lot of that taking place from African entrepreneurs?
ERIKA VAN DER MERWE:  I can speak from a South African perspective if you see South African Private Equity fund managers. If you look at it from that level, sort of going in and setting up funds and local offices in the region, certainly we know there’s plenty of skill in West Africa and East Africa as it is – plenty of Africans returning from elsewhere, having worked in other markets, and those who have stayed. There really are substantial skills components in these countries, but we can see some of that being transferred also from South African Private Equity fund managers, as well as at the operational level. The portfolio companies that they manage as they expand northwards are also transferring skills – but also learning from the locals.
