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Is Atlas Mara start of institutional investor stampede?

Summary: Bob Diamond, the ex-CEO of Barclays Bank, Ashish Thakkar of the Mara Group and Arnold Ekpe, the former CEO of Ecobank, have joined forces to raise funding for a new pan-African bank. The new venture, Atlas Mara, is expected to acquire an Africanfocused financial institution and scale it up but its activities will not be confined to the continent. Sherelle Jacobs explains why international institutional investors are beginning to take a serious look at what Africa has to offer.

Bob Diamond, the 63-yearo l d British-American banker departed from Barclays in July 2 01 2 after the financial institution was fined when it came to light that the bank was involved in manipulating LIBOR rates. As t he CEO of t he global institution, the buck stopped with him and whether he was aware of what was going on or not, he had to carry the can. (The LIBOR, or the London interbank lending rate, is the mechanism by which $3 trillion worth of financial transactions are made).

Nonetheless, Diamond made a headline-capturing comeback in December 2013 when he raised $325m to form a shell company, Atlas Mara, for the intended bank. The shell company is listed on the London Stock Exchange and the money raised from the arrangement will then be used to purchase a bank, and to finance the necessary acquisitions for the enterprise to grow.

Atlas Mara is to " focus on acquiring a company or business in the financial services sector with all, or a substantial portion, of its operations in Africa", according to its prospectus, although the prospectus does later state : " Investments in African countries are subject to greater risks than investments in more developed countries including, among other things, the risk of a greater likelihood of severe inflation or def lat ion, unstable currency, corruption, war and expropriation of personal property than investment in more developed countries."

The prospectus also goes on to state that the bank's scope will not necessarily be l imited to Africa: "Although, given the experience of the Founders and the Board, the Company expects to focus on acquiring a company or business in the financial services sector with all or a substantial portion of its operations in Africa, the Company's efforts in identifying a prospective target company or business are not limited to a particular industry or geographic region."

Diamond's two business partners in the venture are Ashish Thakkar, which owns t he Mara Group, a company that does business in 16 different African countries, and Arnold Ekpe, the phenomenally successful former CEO of Ecobank Transnational. Diamond and Thakkar have put in $20m of their own money into the project.

Thakkar is an iconic entrepreneur who started his first business, which was in computers, at the age of 15. He was born in Britain after his family had f led from Rwanda because of the genocide in 1994. He spent part of his life growing up in Uganda and the rest in the UK and currently lives in Dubai. His conglomerate, Mara Group, has IT, agriculture, real estate and manufacturing operations and employs around 8,000 people.

Bob Diamond's other partner in the Atlas Mara venture is Arnold Ekpe, who is to be the chair of Atlas Mara. He returned to Ecobank for a second stint as its chief executive officer in 2005 after also holding the post between 1996 and 2001. In the 1990s, Ekpe worked for Citibank, serving as the vice-president and head of sub-Saharan Africa Structured Trade and Corporate Finance. A graduate of Manchester University and Manchester Business School, he was also the chief executive officer of UBA between 2002 and 2004.

Atlas Mara is a breakthrough venture for Africa. It is the first listed cash shell focusing on the African financial sector. The smooth raising of capital for Atlas Mara on the stock exchange is a lso l ikely to further contribute to the general sense of excitement on an international level about the f inancial and business opportunities which Africa offers. In particular, the high-profile capital raising has caught the eye of many institutional investors at a time when there is already increasing interest in Africa among institutional investors.

There is strong evidence to suggest that institutional investors are becoming more and more drawn to Africa. According to a recent Invest AD report called Into Africa: Institutional investor intentions to 2016, investors believe that Africa has the most investment potential out of all the frontier markets. When asked to select two favoured regions out of five, 66% of those surveyed who were interested in frontier markets said African countries like Nigeria and Kenya offered the best opportunities in terms of frontier markets. This made Africa more popular than Asia, which was the favourite for 44% of those surveyed, and Latin America, which came top for just 29% of participants.

The report also claimed that institutional investors intend to boost their asset allocation in African countries in the following years. Many will be starting almost from scratch in Africa. One in five of participants in the survey had zero allocation in the continent. Two thirds of investors managing more than $10bn had zero a l location; a lmost a quarter had allocation amounting to less than 1% and even this was frequently "as part of a pooled investment in global frontier markets".

Nonetheless, according to the report, all participants anticipated that their firm's operations would be exposed to Africa in some way in the following years. Almost a third expected that a minimum of 5% of their fund's value would be located in Africa by that point.

Unsurprisingly, natural resources and commodities are playing an important role in attracting institutional investors to Africa. Africa sits on a tenth of the world's oil supplies and 90% of platinum group metals. The continent's bulging middle class is also luring investors. Africa's middle class is now around 300m and it has the fastest-growing middle-class segment on the planet.

The African Development Bank's definition of the African middle class, includes those spending the equivalent of between $2 and $20 per day (which might sound small but is based on the cost of living on the continent). The number of middle-class people in Africa has increased 100% over the last two decades. According to the AfDB, 'stable middle class' in Africa is around 123m, or around 12% of the continent's total 1bn population. The bank projects t hat t he number of middle-class Africans will grow to 1.1bn by 2020. At 42% they will also make up a larger share of the total African population.

As a result of this growing middle class, consumer spending is projected to jump from $860bn in 2008 to $1.4 trillion by 2020, according to figures from the McKinsey Global Institute. It perhaps comes as no surprise then that 39% of those surveyed for the Invest AD report chose Africa's burgeoning middle class as one of the three out of 12 most appealing aspects to doing business on the continent. This is compared with a 34% score for high commodity prices and 35% for high growth rates.

Institutional investor interest in Africa is transforming in its character, from short term and speculative to longer term. Invest AD argues that before the 2008 financial crisis , investment in Africa was in the form of "low-cost capital in search of shortterm yield ", something which the demise of Lehman Brothers caused to disintegrate. However, since the financial crisis, attitudes to the shape that investment in Africa should take is changing. In the survey, 64% of investors believed that longer-term investment will be necessary due to the unpredictability of the market and limitations on liquidity.

The positive outlook for Africa among institutional investors is likely to be connected to the strong growth rates projected for Africa in the coming years too. In addition, the banking potential in Africa is eye-watering, as the vast majority of sub-Saharan Africa's 1bn people do not use banking services or have bank accounts.

'Explosion' of debt finance

Improvements to Africa's capita l markets are, of course, going to be key to attracting more institutional investment. On the whole so far, capital markets in Africa are small, have low liquidity and low depth, which will deter a lot of investors for the time being.

However, there have been some positive changes recently in terms of better access to capital markets and higher yields. Higher yields in Africa have proved a particularly attractive factor for those in search of better returns than in developed countries, where interest rates are low. As a result, portfolio investment and foreign direct investment to the region has increased from $13.2bn in 2003 to $4.8bn in 2012, with foreign direct investment comprising two thirds of this. An increasing proportion of foreign direct investment is concentrated on Africa's consumer markets rather than just natural resource industries.

Equity markets in Africa are also becoming more attractive to outsiders. Trading in the region's debt markets, not taking into account South Africa, increased more than three-fold in 2007 to around $12bn, a trend in which Nigeria led the way. In August 2012, interest in Nigerian sovereign debt surged when JP Morgan revealed that it was adding Nigerian government bonds to its government bond index for emerging markets.

Nonetheless, equity markets in Africa do remain small with limited liquidity and investment is biased towards a few stock markets, namely Nigeria , South Africa , Kenya, Zimbabwe and Mauritius. According to a Deutsche Bank report, the Johannesburg Stock Exchange alone comprised 83% of total market capitalisation and 38% of listed firms in the whole of sub-Saharan Africa in 2012. Most of the companies listed in Johannesburg already have a presence on stock exchanges outside of Africa.

That said, other capital markets (apart from South Africa) are attracting interest, especially Nigeria, which deserves a closer analysis. In 2012, the Nigeria Stock Exchange represented 7.7% of total market capitalisation in the region. According to Deutsche Bank, 15 out of 100 of the biggest firms in sub-Saharan Africa are Nigerian, two of which are in the top 25.

The explosion of debt trading in Nigeria came after Nigeria brought back a large amount of its external debt after obtaining Paris Club debt relief. Development of Nigeria's bond trading infrastructure has also likely encouraged greater activity. For example, the Nigerian Stock Exchange in February 2012 launched a new trading system aimed at retailers, ca l led t he Fixed Income Market Making (FIMM) system. The new system aims to expand participation in Nigeria's capital markets as well as improve liquidity levels.

Fundamental changes in Nigeria are making the country more attractive to institutional investors. For example, reforms to accounting and corporate governance have reassured some investors about the ease of doing business in the country. So have improvements in the infrastructure for investment in Nigeria including the Investment and Securities Tribunal. There have been also been reforms of Nigeria's legal structures, which make the country more investor friendly and its corporate governance structures have also developed.

Trading costs in Nigeria have decreased including rates o f commissions which have decreased dramatically over the last eight years. The Securities and Exchange Commission in Nigeria recent ly lowered the transaction fee for primary market equities by 45% from almost 7% to just over 4%.

One final positive Africa-wide trend is an increase in issuances of Eurobonds. The development is testament to the increased inflow of capital into Africa, which is allowing countries to diversify their investment portfolios. For example, in August Ghana listed its 10-year Eurobond on the Ghana Stock Exchange, the first time in history that an African country has co-listed a Eurobond on its own local exchange, in order to a l low foreign as well as Ghanaian investors t he ability to buy and sell on the secondary market. So far, 13 countries in the region have issued Eurobonds, including South Africa, Republic of Congo , Nigeria , Namibia, Rwanda, Zambia and Tanzania, in order to fund infrastructure improvements or the restructuring of debt.

Corruption still biggest worry

That said, investors still have some concerns about the risks involved when it comes to investing in Africa. According to the Invest AD report, "a striking shift that can be observed among investors is a change in focus from macroeconomic and political worries towards more technical market concerns".

Bribery and corruption was one of the top three worries among investors taking part in the report; 41% of participants said that it was a top concern. However, so were technical issues like weak institutions (a topthree problem for 40% of participants) and capital markets illiquidity (a topthree issue for 36% of participants).

Some also argue t hat today's environment for emerging markets is more complex than it was in the 1980s as it is more sophisticated and integrated. Investors are consequently involved in financial operations ranging from foreign exchange market instruments to domestic bond instruments.

The increasing emphasis on technology means t hat Africa's infrastructural issues can present a challenge. So will preserving stability in the financial sector, and Africa's central banks will have to become more sturdy and improve their regulatory capabilities in the coming years to keep up the momentum of increased investor interest in Africa.

In summary, despite the risks associated with investing in Africa and the traditional perception that Africa is the most hazardous place in the world to invest, appetite for a stake in the country is rising among institutional investors. Atlas Mara and the interest which the new venture has attracted is proof that institutional investment in Africa is turning a corner. n

Although, given the experience of the Founders and the Board, the Company expects to focus on acquiring a company or business in the financial services sector with all, or a substantial portion, of its operations in Africa

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Publication:African Banker
Geographic Code:60SUB
Date:Feb 17, 2014
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