Institutional Investor Emphasizes the Advantages of Investing in Emerging Markets Across Africa
Institutional investors like pension funds have deep pools of capital. If even a small percentage were invested in African infrastructure, it would go a long way towards helping African countries finance their own development, and providing U.S. investors with higher returns than what is possible in developed markets. USAID has a long history of working to mobilize institutional investors, and is currently furthering this mission through INVEST and the Prosper Africa initiative. In an interview with Aymeric Saha, Managing Director of MiDA Advisors, Saha discusses the importance of facilitating connections between U.S. and African businesses and investors, why institutional investors have a fiduciary responsibility to consider investments in Africa, and the perceptions of risk accompanying investments in African markets.
By Emily Langhorne, INVEST Communications Specialist
U.S. pension funds have approximately $18.8 trillion under management, but less than one percent is invested in Africa. This investment gap represents a missed opportunity given that Africa was home to more than half of the world’s 10 fastest growing economies last year, the continent has one billion consumers, and over the next two decades, its workforce will grow to contain 1.1 billion people, making it the largest on the planet.
Africa needs investment. The gap between the continent’s infrastructure spending and the amount required to ensure electricity, water, and sanitation access alone stands at about $3.3 trillion. This amount far surpasses the budgets of all the world’s aid agencies and donor resources combined, but it’s just a small fraction of the world’s more than $89 trillion in assets under management.
Meanwhile, as U.S. public pension funds are facing a funding crisis with investment returns continuously underperforming against long-term expectations, investments in Africa are well-positioned to offer attractive solutions. The persistently low interest rates in developed economies make it difficult for these asset owners to generate the cash flow required to meet their long-term obligations by investing in Western markets alone. African infrastructure assets have long-dated, inflation-resilient returns that match the long-term liabilities that institutional investors must pay out, and they have the potential to deliver excess investment returns.
Despite the opportunities, institutional investors have remained hesitant when it comes to investing in the continent, largely due to perceptions of risk and lack of information about market opportunities
This is where the U.S. Government comes in. In 2017, USAID signed a partnership with the National Association of Securities Professionals, forming the USAID’s Mobilizing Institutional Investors to Develop Africa’s Infrastructure (MiDA) Program. From 2017 to 2019, the MiDA Program provided technical assistance and ran investor delegations to Africa with several U.S. pension funds, offering American institutional investors the chance to learn about investment opportunities directly from their African counterparts. They visited infrastructure sites, met with members of the African investment community, and explored co-investment opportunities across multiple sectors.
With a little more than $2 million in grant funding, the U.S. Government’s MiDA Program mobilized $1 billion in two-way investment commitments between the U.S. and Africa.
At the program’s conclusion, Aymeric Saha, its Managing Director, along with some of its other principals, established MiDA Advisors, to continue the program’s mission. With Saha as its CEO, MiDA Advisors, focuses on increasing U.S. institutional investments in African infrastructure and markets. The U.S.-based advisory firm continues to work with USAID in support of the Prosper Africa initiative, helping investors better understand the continent, introducing them to the risk mitigation tools, providing transaction advisory, and driving investments that are mutually beneficial for Africans and Americans.
The following interview has been edited for clarity and length.
How did you become involved with connecting U.S. investors to opportunities in Africa?
Saha: My family is from Cameroon. We moved to Washington, D.C. in the late 1980s. I grew up in the D.C. region and have lived here for most of my life, but I went to a French school because my parents thought it was important for me to preserve my French language skills. I still visit Cameroon. It’s a place where I have a lot of connections and family. The ties are still strong.
I have always, from my undergrad days in the late 1990s on, focused on investing in Africa. I studied finance because I believe in the power of investing in emerging markets and developing countries. I worked at the World Bank because of its mission of supporting development. My focus was on risk issues, risk oversight, and risk modeling. Afterwards, when I worked in the U.S. Congress as a senior policy staff on banking reforms in the aftermath of the financial crisis, I also worked on the Power Africa initiative because it was my passion to support investments in Africa that also benefited U.S. investors.
I identify with both regions. What’s unique about the United States is that you can do that here — identify with two places — particularly in Washington, D.C., where diversity is well-recognized as a strength. When I’m in Africa, they call me American. When I’m here, I’m American, but people know that I’m an immigrant, a first-generation American, a mix of cultures and backgrounds. Therefore, I try to use that in the way that is most productive.
I’m having a lot of fun connecting the two regions — the two cultures — and presenting the opportunities to both sides. There is nothing else that I would rather do. Frankly, there’s probably nothing else that I should be doing because Africa needs these opportunities, and U.S. investors need to be better connected with, better educated about, and more exposed to investing in Africa. For that to happen, you need people who understand both regions and can facilitate these exchanges.
Could you explain how you came to lead the MiDA Program and how this program evolved into MiDA Advisors?
Saha: When I was working for Congressman Gregory Meeks, now Chairman of the House Foreign Affairs Committee, he asked me to lead his support on Power Africa. I started engaging more directly with USAID to see how we could tap into U.S. financial institutions and investors to support the power sector in Africa. At that point, conversations started about how to expose more of the U.S. pension funds, foundations, and endowments to infrastructure investing in Africa.
When USAID decided to partner with NASP to form the MiDA Program, I was selected as the Managing Director. After the program ended, I did not want to stop doing the work of supporting investing in infrastructure in Africa; therefore, I took the lead to create MiDA Advisors.
MiDA Advisors is a transaction advisory firm. We are still working with USAID but as an implementer of its investment support services. We have gone from being an entity that was a USAID program fully dependent on USAID funding to an entity that works with USAID as well as other entities. Therefore, we are much more sustainable than we were a year or two ago. The objective of USAID was always to ensure that what we did with the grant funding could continue on a commercial basis, and we’ve made great progress in doing so.
How does investing in infrastructure and small and medium-sized enterprises (SMEs) improve the livelihoods of people of across Africa?
Saha: Infrastructure is directly connected to economic development. It’s connected to having the right enabling blocks for a vibrant economy. It’s needed for trade. It’s needed for transporting goods and services to markets. It creates jobs; therefore, it’s connected directly to the economic potential of any country. Africa needs infrastructure. It’s a big continent. It’s less developed, and it needs to be able to get its production to market, to transport goods and services. It’s critically important, and it remains our core focus.
Private equity investment into SMEs is also extremely important. Like in any other country, we have seen that SMEs are driving job creation. They are the source of innovation. They tap into the economy across different sectors — from consumer goods to healthcare to infrastructure as we talked about and other vitally needed goods and services. We know that SMEs in Africa are the driving source of the economic revival of the continent. It exposes growth opportunities like no other entity can. It allows African entrepreneurs to tap into resources to help them get the next level in terms of scale and sophistication. I think that one of the best ways to tap into that growth potential as an investor is private equity because you are giving SMEs on the continent that are thriving the resources to tap into the next level of development. For an investor, particularly as a more passive U.S. investor who does not have boots on the ground and will not establish an office in Africa but wants to invest there, investing through private equity to tap into SMEs is a very efficient way to do so because it offers exposure to, and supports entrepreneurship and job creation in the growing markets of Africa.
Do institutional investors have a fiduciary responsibility to consider investments in Africa?
Saha: They do because the word fiduciary means that you have to look for ensuring that your client gets access to the best opportunities. If I am a fiduciary of a portfolio of investments, I cannot just look at opportunities for my clients based on certain perceptions or limited data. I cannot exclude a whole region that would be representing 25 percent of the global population within a few years. Therefore, as a fiduciary, I need to look at all the data sets and all the opportunities to make sure that my client gets access to all of them that are suitable for their investment guidelines and preferences and risk tolerance. Therefore, as a fiduciary, you need to look into Africa because if you don’t, you are excluding potentially suitable investments for your clients, and your role as a fiduciary is to look into all of those opportunities and provide the best advice for your clients.
I recognize that these consultants often lack the right mandate to go further than what they are currently doing. I think that one of the reasons USAID created the MiDA Program was to ensure that we could help these investment advisors explore opportunities beyond their current investments. We’ve brought investors, consultants, and advisors to Africa and shown them that they’re ignoring a whole region that is going to be a significant region.
How does the perception of the risk about investing in Africa differ from the reality of investing in Africa?
Saha: The perception of risk for anything that you don’t know is high. I spent a large part of my career working in quantitative risk modeling. It’s very simple: anything that you cannot understand, do not understand enough, or do not have a history of monitoring to quantify, you will perceive as high risk. If you perceive it to be high risk, you are going to price it at a high premium, which makes it less affordable and sustainable.
That is what is happening in Africa because most U.S. investors don’t know the continent. Their advisors haven’t taken the time or done the research to better understand it, so investing in Africa is at a very high premium. Unfortunately, that means that a lot of investments that should be going to Africa are not going to Africa.
Those who have done their research and analyzed the data have realized that the perception of risk was most likely too high. I’m not saying that there are no risks, but the premium is off.
We are trying to educate U.S. investors about the real risk of investing in Africa so that they can mitigate and price it more effectively. We encourage them to look at Africa, collect the data, and do the analysis. If they do that, they’ll find that Africa is a lot more competitive and a lot more profitable compared to other regions in emerging markets.
What are some effective strategies for mobilizing investments into African infrastructure?
Saha: There are different ways to get into infrastructure investing, so we look into different instruments that are suitable for investors. Recently, we have been focused on trying to structure more of certain types of financial instruments that we know U.S. investors are comfortable with and use those instruments to channel their capital into assets in Africa. It’s still about investing in Africa but investing through solutions that are already adapted to U.S. capital markets.
The strength of U.S. capital markets is one of the greatest tools that development agencies can use to further extend their initiatives, so we work with different development organizations to see how they can help mitigate risk — whether that’s first-loss capital, technical assistance, guarantees, or other blended finances tools.
We also support African investors in investing in Africa’s infrastructure. It’s important for them to invest more in the real economy and for them to bring in local currency to make the financing more sustainable for the asset. Having them in the room can also reassure U.S. investors because African investors are better positioned to understand the local markets and risks. When our African counterparts co-invest, it’s reassuring because they are sharing risk with us.
Having that risk-sharing and that support from development partners is important. It allows us to tap into U.S. capital markets where we can find investors who can provide long-term, affordable financing that can help African consumers get access to more sustainable infrastructure. Over the past couple of years, we have seen pension funds in the U.S. that have never been exposed to Africa go from knowing nothing to investing millions.
What we’re trying to do in the second phase of this work is help more institutional investors be able to make those decisions and encourage them to look beyond their immediate circle of opportunities. I’m excited that Prosper Africa is keen on supporting solutions that can help scale up U.S. investments into Africa. We know that the long-term fundamentals are strong. Africa is absolutely taking its place in the global economy, so it’s important that U.S. investors be better connected to those opportunities.
This post is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this blog are the sole responsibility of INVEST implemented by DAI and do not necessarily reflect the view of USAID or the United States Government.