Getting in on the ground floor.

Investing in the new South Africa is not for the faint of heart. The value of your investment holdings could go through the roof--or the bottom could fall out.

TEN YEARS AGO, YOU COULDN'T HAVE BET A PLUGGED NICKEL on a wildebeest race in South Africa. Today, however, financial market players can cash in on a plethora of investment opportunities that have emerged from the ashes of a crumbled apartheid. But if you're thinking President Nelson Mandela's new South Africa is an investment panacea--think again.

"Sure, there are plenty of opportunities to make money, but traditional emerging market risk--losing investment value as a result of currency devaluations, political instability and, of course, making the wrong kind of investment--could sour your portfolio," says Judith Aidoo, president of The Aidoo Group. "You should not go into South African investments on emotional impulse," says Aidoo, who advises cash strapped governments in Africa. "Sticking with the fundamentals and doing your homework will cut down the risk."

As Aidoo points out, there are common risks associated with all emerging markets. However, there are degrees of risk assigned to different markets and investments.

As far as South Africa is concerned, the perception of the new democracy as a viable investment opportunity has improved dramatically in the past year. Two of the major credit rating agencies have expressed a middle-of-the-road confidence in South Africa. Standard & Poor's and Moody's Investors Service have ranked the sovereign debt of South Africa "BB" and "Baa3," respectively. The designations from these two New York agencies rank South Africa's debt predominately speculative. "But, the outlook is better than in Mexico," says Aidoo.

Analysts' statistics on how individual investors are dealing with the positive outlook aren't available yet, but institutional interest appears to be growing.

According to the Investor Responsibility Research Center, a Washington-based research firm, by the end of the third quarter of 1994, more than 20 U.S. public pension funds and other institutional investors had shifted assets into the country. Executives at California Public Employees Retirement System (CALPERS) have said they are slowly reinvesting some $5 billion in South African stocks and bonds that it had withdrawn during the apartheid years.

Meanwhile, Morningstar Inc., a Chicago-based research company, reports that at least 15 open-end mutual funds have taken new positions in South African securities.

Caution: The aforementioned are a brazen bunch of sophisticated investors who revel in risk. They have taken their chances in Mexico, Venezuela and Korea, and they are fully aware that the same potential for loss exists in their new ventures in South Africa. And, as eager as some arc to pump seed capital into the country, other investors are holding back.

INVESTING IS RISKY BUSINESS

Among the major concerns was South Africa's retention, until earlier this year, of a dual currency--the financial rand and the commercial rand.

The financial rand was created when economic sanctions cut off South Africa from the world. A complex financial mechanism, the "fin" rand was designed to attract foreign investment into the country and make it costly to take it out. The fin rand was used primarily for financial transactions-buying and selling stocks and bonds. The commercial rand, on the other hand, was for trading of goods and services.

According to research reports from Robert Fleming Inc., a London-based investment banking house, the gap between the two currencies loomed as large as 20% at the beginning of the fourth quarter of 1994. However, in March, Mandela's administration ended the dual currency system by getting rid of the fin rand. "With the dismantling of apartheid and the lifting of economic sanctions, there is no longer any need for the fin rand," says Fleming vice-president John Balfe.

ANOTHER PROBLEM

The interlocking structure of South Africa's stock market presents another hurdle to investing there, says Sean O'Connor, managing director of Standard Bank Group, one of the top four banks in South Africa.

The pre-Mandela government created a stock market structure where six holding companies control approximately 87% of the Johannesburg Stock Exchange. The six are: Anglo-American Corp., with control of over 43% of the listed companies; Rembrandt Group with 13%; Sanlam with 10%; South Africa Mutual with 10%; Liberty Group with 7%; and Anglovaal Group with 4%.

These holding companies, says O'Connor, exist in a maze of share ownership, and cross directorships, which in turn has produced a myriad of subsidiaries. These companies have interests in every facet of the South African economy, from precious metal mining to life insurance and the export/mining business. Of the 654 companies listed on the exchange, only about 7% actively trade; hence, the lack of liquidity in the market.

Under Mandela, these companies are being pressured to participate in "unbundling" their tightly held holdings, says Wallace Ford II, a former deputy Commissioner of the New York State Department of Commerce. "They are selling off non-core business and thereby creating opportunities for qualified buyers," adds Ford, now a partner in the New York law firm of Marks & Murase.

These moves will make it easier for foreigners to do business in South Africa. "After they take their first and second looks at investment opportunities, companies and individuals alike want to be assured that there are practical vehicles in place so that they can do business," Ford notes. Through his firm, he is involved in developing a wide range of new business and economic links between American cities and Johannesburg. "Actually, there is a growing liquidity in what had been a confined market," he says.

As in most areas of the world, money and politics go hand in hand. For this reason, David Simpkins, a currency trader and division manager with AYM Financial in Philadelphia, keeps a watchful eye on the political stability of South Africa. "The biggest thing to worry about is Mandela," warns Simpkins. "He has already said that his will be a one-term presidency. With that, the world is wondering just who will take over for him and whether that person will be able to generate investor confidence."

NEW OPPORTUNITIES IN AN EMERGING MARKET

Despite investor wariness, when the government floated a $500 million 12% South African Global bond late last year, investor demand was so great that the issue was increased to $750 million. Due in 1999, the issue was offered 198 basis points over comparable Treasuries. (A basis point is a hundredth of a percentage point.) At the time, S&P said, "The debt issue is supported by continued sound macro-economic management, structural reform and the country's sociopolitical transformation."

Those heady two-dollar words simply mean that the New York-based rating agency believes that Mandela is repositioning South Africa to reenter the world marketplace. In fact, many analysts believe Mandela has displayed an excellent handson management style and is doing a good job of turning the country around.

Perhaps a better testimonial to investment opportunities is Morningstar's list of open-end mutual funds that have added South African companies to their holdings since December. Among them are: Lexington Worldwide Emerging Markets (800-526-0057), which has allocated 13.93% of its holdings to investments in South Africa. Lexington boasts an 8.83% total return over the last five years. Ivy International (800-456-5111) has allocated 9% of its asset base to South African holdings. Actually, Ivy has three funds "A," "B" and "I" with South African interests. Only the A fund has been around long enough to generate a five-year total return of 8.16%. And finally' PaineWebber Atlas Global Growth (800-647-1568) has reserved 8.96% of its portfolio mix to South Africa. Only one of PaineWebber's Two Atlas Funds is able to post a five-year total return of 1.69%.

Also scheduled to make its debut this quarter is the Calvert New Africa Fund (800-368-2748). Calvert, a "socially responsible" asset manager, is based in Maryland. It has named New Africa Advisers (see related story this issue, "The Nonstop From Durham") as the sub-advisor on this open-end retail fund. New Africa is a division of the Sloan Financial Group, which is also the parent company to NCM Capital Management. According to Reno J. Martini, chief investment officer of Calvert, New Africa will invest approximately 40% in listed equity companies and about 60% in South African debt securities.

These open-end funds provide the best way for ordinary investors to participate in South Africa's reemergence, says Simpkins.

Among closed-end funds, the Morgan Stanley Africa Investment Fund, the Southern Africa Fund (managed by Alliance Capital) and the New South Africa Fund (managed by Robert Fleming) all have African-American investment firms as underwriters or sub-advisors, says Harold Doley of Doley Securities in New Orleans, a BE 100 company. A quick perusal of these funds' prospectuses reveals that black firms have participated on a varied, somewhat limited, scale.

"We have been able to syndicate [sell] a part of all of the closed-end funds that have been offered," says Doley. "Some of these funds invest in all of Africa, some just in the southern region and some just in South Africa," he explains. "The exciting thing is that there is so much growth potential in construction, commerce and mining that sometimes you have to go slow and gauge just what you want to invest in." Doley adds if you're going to invest in South Africa, "make up your mind to be in it for the long term."

Besides the mutual funds that are accessible to individual investors on the open market, Morningstar points out that the Africa Growth Fund has been investing in South Africa since 1987 as a private limited partnership. Initially capitalized with $25 million, the fund has performed so well that its risk insurers, the Overseas Private Investment Corp. (OPIC), has underwritten the same type of insurance for the $75 million Africa Growth Fund II. Among the initial growth fund's U.S. limited investors are heavyweights Citicorp and a Rockefeller trust group.

Looking at specific industries, Simpkins says that infrastructure investments in "kick-start" economies are a good bet. "We're talking about highways and sewers, electricity and power generation," he says.

"The key is information, information, information," says Ford. Individuals should consider established companies in the computer industry, telecommunications, even low-end consumer goods. "If you're going to invest ... seek out firms that have a historical relationship with South Africa," he advises. "Companies like Pryor, McClendon, Counts & Co. or M.R. Beal & Co. have done a lot of business, mostly for institutional clients. But at least they have relationships with the major players in the country. When the market really opens up, these guys will be in the catbird seat."