Keynote summaries, interviews and more from the event
Visit our website >>
It’s an uncertain time for the world as we grapple with the effects of the pandemic, said Paul Boynton, CEO of Old Mutual Alternative Investments. While the impact on population health in some emerging markets like Africa has been relatively benign compared to the likes of Europe and US, the economic impact is a little more complicated as it’s linked to global supply chains and dislocation issues.
Janusz Heath, Managing Director, Head of Investment Management Emerging Markets at Capital Dynamics, believes it’s important to continue to identify great managers in emerging markets and the economies that have the potential to produce great returns to help getting EMs back into investors’ minds.
The African continent on the whole is certainly one to watch for. In more recent times, Africa private equity has seen some issues with returns and scaling, but the macro picture is solidly positioned, and the demographic argument is compelling – it already is a huge market and will continue to grow.
While there is some debate on whether China can still be considered as an emerging market, they certainly have been highlighted as the biggest focus for emerging markets opportunities. It is certainly a huge economy that cannot be ignored, but there is a lot of geopolitical noise that investors need to look out for. Not unique only to China, political noise now plays more of an important factor in investment decisions – an example of this being Ethiopia.
So, how can you attract investors back to emerging markets? For Heath, this is going to be liquidity – if they see returns and liquidity, it will give investors more confidence to step back in with more enthusiasm.
Another growing trend to watch for is the return of new managers with new focus and targets. The ecosystem is evolving and there are more managers who have previously operated in other regions, such as the US and Europe, and brining their experiences and network back to Africa.
It’s agreed that to operate and succeed in emerging markets, you’ll need a lot of resilience.
What's on the mind of LPs? Our panel of emerging markets managers share their thoughts.
One of the biggest issues for emerging market LPs based outside of the areas they invest in is the travel bans brought in as a result of the pandemic. Many of the global investors rely on travelling to meet the local managers on the ground to do their due diligence before allocating capital.
When human capital is a key part of your business, Zoom just isn’t enough for LPs to tell what the real investment team is like. Being on-site for a few days enables you to meet over multiple engagement points that gives you a more holistic view of the team.
However, it’s agreed that emerging market GPs have been fairly open in their communications and level of transparency with information, which has made the situation better to cope with.
What does this mean for first-time fund managers with no existing relationships? Unfortunately, they might have a challenging time raising funds, said our panellists.
While there are some funds with higher risk tolerance and are willing to allocate with only an online relationship, a lot of LPs will still need the face-to-face time before committing – and that’s especially true of emerging markets.
So, what should these managers do? From inviting LPs to co-invest to showing them exciting deals, the best way will be to prove yourself, catch LPs’ eyes and close the trust gap by demonstrating your skills and track record of some form. Be patient, 2021 will be very tough, they said.
While survey results suggest allocations to emerging markets will decrease, our panellists have confidence that investments will either continue at the same rate or increase for them. Some still had strong pipelines and have seen many opportunities out there. Others felt while there maybe no strategy change for them, but there may be a change in sectors – potentially to tweak their focus more towards technology and tech-enabled businesses. Our panellists also urged for investors to look at the long-term view and to focus on broader secular trends.
While there are unpredictable political and currency risks, economic activity in emerging markets is increasing and that’s not one to ignore. The perception of emerging markets being risky is particularly acute today, but of course, there is financial risk everywhere – including developed markets. What “risk” means can differ for everyone, and it depends on what your risk threshold is for each type of risk in the market.
It’s unanimously agreed that impact should not be concessionary or pure philanthropy. It can be, and should be, a part of any investment. They are capable of having the same returns, or even excess returns, from the relevant ESG benefits.
Where are the opportunities in 2021?
Our panellists suggested technology and tech enabled businesses, sustainability, financial services, and healthcare.
Hear from Zachariah George.
COVID-19 has been paradoxically quite good for the African VC market. The African VC market had more than $2 billion of funding in 2019 and if you compare the first ten months of 2019 – so January to October 2019 – versus January to October 2020, we have seen a 25% increase in VC funding.
What’s notable though, is the number of deals that have been funded had gone down, but the total amount of funding and, by extension the amount of funding per deal, had gone up. That’s not particularly surprising because in certain industries like financial inclusion, healthcare and education that have increasingly become digitalised, there is a greater proclivity of services
essential services going online and Africa is a perfect market for that. So, despite the COVID-19 pandemic, funding into African venture-backed firm has actually gone up.
As most people are aware, financial services, which is predominantly financial inclusion, fintech and insurtech, have always had the lion’s share of venture capital activity in the African continent. Over the last year we’ve seen logistics and mobility – anything that makes cities safer and transport easier – receiving a huge amount of interest.
But since the pandemic started, digital health and digital education have gotten a lot of interest. Because these are essential services that need to be digitised, the pandemic has just hastened the approach from founders as well as large corporates in understanding how to get the essential services online.
So, if anything, the pandemic has helped people achieve their four- or five-year goals in one to two years – and it bodes well for the future of VCs on the continent.
Technology has always been the greatest enabler of innovation – not just in Africa, but in most of emerging markets.
What I’m most bullish about is the fact that technology is slowly being used to disrupt businesses that traditionally were not considered disruptive. Examples of this include mining, property, manufacturing, and agriculture. The use of technology around sensors, drones and internet of things are penetrating industries that have traditionally been held by large corporates, agricultural houses, retailers, insurers etc.
We have seen the adoption of technology as more of a necessity rather than
than a nice to have, and the push is coming from the end consumer rather than from the producers of services, which is a very positive thing that we’ve been seeing in Africa.
I see the African VC industry growing by leaps and bounds. We’ve grown from $20 million in VC in 2011 to $2 billion in 2019, and I see that number growing much higher in 2021.
2020 has already seen record numbers from a VC standpoint despite the pandemic. We’ve also had a lot of exits this year – we had 6 major tech firms being sold to both international as well as continental buyers, and that only creates more deal flow at the early stage. The more exits you see from an M&A standpoint, the more funding goes into earlier stage deals, so I see a huge growth potential in the African VC market in 2021.
Natalie Shriber, Investment Manager, Fund Investments, Triple Jump
Nadia Nikolova, Lead Portfolio Manager, Development Finance, Allianz Global Investors
