🎧 S1E2 | Colin Smith, Managing Partner, All Africa Partners LLP

Colin talks about why investing in African equities is an active manager's dream, misconceptions about investing in Africa, and how his previous career as a professional rower helps his work today.

FULL INTERVIEW TRANSCRIPT

Chipo Muwowo: Good to see you, Colin.

Colin Smith: Nice to see you Chipo, thanks for having me.

Chipo Muwowo: Thank you for agreeing to join me today.

Now Colin, All Africa Partners invests solely in African listed equities. Why did you choose that particular asset class as your chosen place to play, if you like?

Colin Smith: Well, there's so many reasons. I mean, for starters, I'm Zimbabwean, so this is a mixing business with pleasure for me. And I've been interested in the stock markets for as long as I can remember. My business partner, Farouk, also has more than a decade's worth of experience in listed equities, with a lot of experience in North Africa and the Middle East. So we come at it with experience and sort of genuine interest. And we just see a really terrific opportunity there. So it's a real sort of active manager's dream in a sense. [You’ve got] growing economies, you’ve got real structural tailwinds, inefficient markets, and then to boot you've got wonderful, wonderful companies [with] great management teams, proven track records, terrific resilience. You take something like an MTN Ghana. It's been listed six, seven years billion dollar company, wonderful management team, utterly dominant in their home market. There's zero sell-side coverage on MTN Ghana. Hardly anybody knows about it. We see that as a terrific opportunity.

Chipo Muwowo: Before we delve into some specifics, I'd like to just zoom out a bit and talk about your fund's mandate. Can you give us a flavour of what it aims to achieve and what some of the parameters around it are?

Colin Smith: So we're looking to invest on behalf of institutions and family offices. At the moment, we're still fairly small. But we aim to be investing fairly significant sums of money across African companies that are focused on Africa. Now, that may be a company that's listed in London, like an IDH, which is an Egyptian diagnostics business, but it's listed in London. Or it could be a Jumia, predominantly Nigerian e-commerce company listed in New York, but really we're investing in businesses that are on recognised exchanges where the majority of their business is in Africa. We don't invest in commodities perhaps unusually for an African-focused manager. Basically we see commodities as very significant ESG risk a lot of complexity historical complexity because of colonialism in Africa, and the involvement of government and regulators in that sector. And frankly, if we know what's going to happen to the gold prices, there are easier ways to play that game than through listed equities in Africa. So, you know, we leave that to specialist managers, but look at more or less everything else.

Chipo Muwowo: And what about countries? Can you give us a flavour of that as well? And are there particular countries that perhaps you don't invest in for different reasons? Yeah, where are you allocated at the moment?

Colin Smith: Yeah, so I mean, you know, once you exclude very, very small exchanges or sort of exchanges that just have one or two companies on them that really aren't investable, out of the 54 countries in Africa, there are 20 countries that have exchanges that are investable for us. South Africa is the biggest of those. They account for around 60% of the companies both from a market cap point of view, as well as just sheer numbers of companies. And then you've got several countries at the other end of the equation [such as] Botswana, Malawi, even Ghana where essentially there's only one or two stocks that you can invest in because they're big enough but they still form a part of the 20 countries that we can invest in. So part of our job is to just determine at any given time where the best opportunities are. We're really bottom-up investors. We're just looking at the fundamentals of the companies. But because we're investing across 20 different exchanges, 16 different currencies, we do have to have an eye on the macro even though we're not macro top-down investors. So you know we do think a lot about you know US dollar availability for investors. We think a lot about the regulatory environment in which you know these companies are operating. And it might be that we choose not to invest somewhere because you know there isn't any dollar availability. Zimbabwe is an example of that at the moment. We may choose not to invest somewhere because we think the companies are wonderful but we just can't see enough liquidity trading. Tanzania is an example of that at the moment. And then you may see you know companies in countries where you know you really like what you see, you like the companies, but actually everything is sort of relatively expensive or fairly priced in that market at the moment. So different reasons why we may choose not to invest somewhere. But really you know we run a very concentrated portfolio and we're just looking for the best of the best. You know we have 10 positions at the moment, so it's not a lot of companies out of the opportunity set of 250, 260 companies that we can invest in.

Chipo Muwowo: You touched on sell side coverage of companies earlier. Just looking across the continent, a handful of companies, arguably, are properly covered by sell side analysts. How do you go about conducting your own research into these businesses? What have you found to be, you know, really helpful ways of getting to know the businesses and developing an understanding of where they're at in their journey and whether they're investable or not?

Colin Smith: Well I guess the first thing is, you know, 250, 260 companies and the opportunity to say it's actually possible to know something about every company. And I think we could speak intelligently about every one of the companies and our opportunity set. Obviously we'll know some a lot better than we do others. So you know when new companies come along it's really through IPOs or other kind of reorganisations where you can see a new company being added to the list, and we're seeing quite a lot more IPO activity at the moment. We don't typically use a lot of sell-side research or we like to see sell-side research there because we know that it speaks to the depth of the market, it speaks to other emerging market managers taking an interest, it speaks to broker participation in the market, so it really speaks to the depth of the market and we do obviously read some broker reports from time to time, particularly when we're trying to understand a new industry or a country that we don't know very well. But by far and beyond the most important thing is the documents that the companies publish themselves. Now, you will know, but many of your listeners may not know that IFRS applies almost in every one of our markets with very, very few exceptions. And they're all audited by the Big Four and all of the results of these listed companies are published publicly as you'd expect of a publicly listed company. So that's the first and most important port of call for any of our analysis. We will then try to meet with the company if we have specific questions, we will try to meet with competitors, and of course, as you can imagine, we do a lot of in-country visits. So, you know, at least every quarter, one of us will be in one of our key markets. You know, we've just had trips so far this year to Kenya and Egypt and Morocco. We've got more trips coming up to Nigeria, South Africa, all of these are important markets for us. So you know at any given time you know we've got a trip you know just happening or about to happen to one of our key markets and we're trying to learn more and more.

Chipo Muwowo: Now, you invest on behalf of different institutional investors. So you have experience working with different investment groups in Europe and in the US. As you engage in these conversations, what are some typical misconceptions, if you like, that you hear about investing in Africa?

Colin Smith: I guess the most important thing is that for most people, Africa is not on the radar at all. It's just not a part of most people's thinking about where they want to allocate, certainly as far as a global allocator is concerned. If you're thinking about a pension fund in Europe or a university endowment fund in the US, these entities typically invest globally in all different asset classes and Africa doesn't really feature in the thinking. To give you a sense, you know, Africa makes up just 0.4%, 40 basis points of the MSCI All Country World Index, ACWI. It's basically non-existent. And of those 40 basis points, 30 basis points is South Africa and 10 is Egypt. Everything else, these wonderful opportunities in Nigeria and Ghana and Morocco and Kenya are all completely off benchmark for global allocators. So a lot of people don't have a lot of time and dedication to the space. Now, of those, you then have some entities that don't spend a lot of time on Africa, but know Africa very, very well. And that's either through personal travel or previous experience of investing in Africa. That's really helpful for us when folks know Africa and certainly all of our investors are very much in that camp. But they make up the minority. The majority of investors (a) don't look at Africa and (b) don't know Africa very well. So they don't know, for example, that Africa is the continent with more countries than any other. They don't know, for example, that business is conducted in English, French, Portuguese or Arabic across all of our countries. We understand the business language, you know, between us and our team, we've got all of those languages bar Portuguese covered. They don't know, for example, that, you know, there are many companies trading with, you know, billions of dollars worth of revenue and have been around for hundreds of years. You take some of the bigger companies even outside of South Africa, you look at Delta Breweries in Zimbabwe, you look at EABL in Kenya, East African Breweries, you look at something like CIB, Commercial International Bank in Egypt… I mean, these are all multi-billion dollar businesses that have been around for a long, long time and have proven track records of profitability. The understanding of the opportunity set is generally very low at the moment. And then of course, you know, you asked about perceptions and misperceptions and, you know, there are all of the things that you would expect, right? You know, if you've lived in Europe and North America all your life and you're not familiar with these markets, you could be forgiven for believing everything that you hear from Bono and Bob Geldof and everything you hear on CNN, which is generally bad things that happen in very specific parts of Africa. So, you know, we have a lot of people saying to us, well, how do we invest in Africa when there's terrorism in Mozambique? And you say, well, okay, I mean, we're not investing in Mozambique so that's one important thing to know, but also, you know, who would say, well, you can't invest in South Korea because it's next to North Korea? I mean, it's because of the lack of understanding, unfortunately, the negative headlines, which are the ones that make the news, disproportionately shape people's perception of the continent. So a lot of the nuance and the individual markets and the individual stories of companies and the growth opportunities and the, you know, there's 1.3 billion people that live in Africa, you know, some of them are very poor and some of them are in terrible, terrible situations but most of them aren't. You know, most of them are getting richer and going to school and, you know, most of them want warmer homes in the winter and cooler homes in the summer, and they want the latest phone, and they want to drive faster cars, and they want to see the latest movies just like the rest of us. That isn't the story that often reaches the news.

Chipo Muwowo: In terms of sectors that All Africa Partners is focused on, we touched on this a little bit earlier, but I'd like to delve in a bit more. What kind of sectors do you like? What really grabs your attention?

Colin Smith: Well, many sectors. We've spoken about commodities which we don't invest in, but we're sort of happy to look at almost everything else. In terms of the sectors that are currently easily available to us, I mean, banks and telecom companies make up quite a big part of the opportunity set and both of them offer really, really terrific potential to investors. Banks in Africa are just fundamentally far more profitable than they are in the rest of the world. And that's for a fairly simple reason. They get relatively cheap deposits, you know, people are looking for places to keep their money safe, just like anywhere else in the world. But then they're able to invest in pretty vibrant local domestic bond markets. The governments in Africa, many of whom don't have the ability like the Fed or the Bank of England to just print money whenever they want, they borrow substantially from the local bond markets in order to fund government expenditure. And so as a consequence of that, in most of our markets, the real interest rates paid on bonds are very attractive. And yeah, so for the banks this is a terrifically profitable business for them. The banks take relatively cheap deposits and they lend it back really to the government at attractive yields so you end up with very good net interest margins. And the banks in Africa typically earn between 20 and 30% returns on equity. And certainly some of the bigger and more profitable banks which are the ones that we would focus on… I'm thinking of the likes of Equity Group in Kenya, FirstRand in South Africa, Zenith, Guaranty Trust Bank in Nigeria, CIB, Crédit Agricole in Egypt, all of these banks will consistently and routinely earn above 20% returns on equity. The sort of thing that Chase and what have you could only dream of earning. So that's the banking industry, obviously, and telecoms. You know, again, telecoms in Africa are just fundamentally different to what they are in other parts of the world because of mobile money. Many Africans are still unbanked and this mobile money product has been developed, you know, first in East Africa through M-Pesa, which is a product owned by a Safaricom, the listed company there. [It] essentially began using phones as a way to store and transfer money. That was back in the early 2000s. Now that product has morphed to something far, far more sophisticated. And today it's possible for you to do any kind of transaction that you want on a phone, whether it's paying for school fees or paying tax bills or receiving your salary or buying insurance, car insurance, or buying groceries in the supermarket, you could do all of that on your phone in Africa, and you never, ever have to open a bank account. It's an extraordinary, extraordinary development. A complete sort of technological leapfrogging, if you like, of traditional banking system. And it's helping a lot of people come into the financial system. It gives them a secure way to store money, a secure way to transfer money, it reduces the risk of corruption, reduces the risk of theft of money, so it's a hugely, hugely positive product. And Africa is so far ahead the rest of the world in this respect. A recent GSMA report said that we're approaching around a trillion dollars being transacted in mobile money every year at the moment and Africa accounts for 70% of that, $700 billion dollars transacted. These are extraordinary numbers and, you know, people often say, oh, you know, Africa is a technology laggard. Well, it isn't. Not in every respect. And certainly when it comes to mobile money, Africa is miles ahead of the rest of the world. So that's a really interesting sector for us. It's still in its infancy. You've got huge economies like Nigeria [that] only started issuing mobile money licenses last year. Ethiopia, same story. They've only just started releasing mobile money licenses now. you've got a 200 plus million population economy and a 100 million plus population economy that are totally new to this game. So that's a really terrific opportunity for us. And in terms of other sectors, I mean, almost every sector that you can think of in Africa is growing. Of course, the consumer space is growing, you know, consumer staples, consumer discretionary, everything from shampoos and biscuits to bread, it's all growing. People are consuming more of it and the companies that are providing those products are doing it profitably. You know, there's huge growth in things like healthcare and education where, you know, the governments in Africa who are not for the most part flush with cash, are very encouraging of the private sector developing in certain areas and healthcare and education are certainly spaces where governments are encouraging more and more private participation. That means that we are seeing companies like CIRA and IDH, you know, both Egyptian companies coming to the market as listed entities. So, you know, that really excites us. We think the insurance space in Africa is another where, you know, the potential for growth is absolutely enormous. And, you know, Africa is relatively underinsured as a market both in terms of the products that people have and the assets that need insuring. So the runway for growth is huge and I expect we'll see quite a lot more insurance businesses come to the listed space in the next 5-10 years.

Chipo Muwowo: Looking ahead to 2024, what are some reasons for optimism as you look at the listed space across the continent and some reasons for caution?

Colin Smith: Yes, so look, I think the reasons for optimism are, you know, certainly outweigh the list of reasons for caution. It's very, very hard to look past the very good developments in Nigeria in the last six or so months. You know, since the new president Bola Tinubu came into power, there have been already a range of policy changes there that are very, very positive for Africa's largest economy. And, you know, things like how they manage the FX rate in Nigeria, which has essentially procluded international investors from being able to get money out of the country when they want to, and has made it very difficult for the importation of certain products into Nigeria. That's been scrapped. The central bank governor has been changed, a very expensive fuel subsidy there which, you know, it was proven many years ago to essentially subsidise cheap fuel into neighbouring Benin and other neighbouring countries, that policy has been rolled back completely. There’s no more fuel subsidy and the government is instead providing social grants to poorer households that need it. Those are some of the examples of the really, really positive developments that have happened there under the new government. And as a consequence of that, I think we'll see a lot of foreign capital flowing back into Nigeria. It is a huge, huge economy. It's a huge growth opportunity. And history has shown that when Nigeria does well, the rest of the continent does well. I think there are reasons to be optimistic for many of our other markets as well. Ghana, Kenya, Egypt have all had fairly significant devaluations as well as Nigeria within the last 12 months. And generally having those devaluations in the near past [makes it] a very, very good time to invest because they don't always move in straight lines. So the dollar investor into Africa today can buy a lot more things than he or she could have bought not that long ago. And if you look at even at an economy like South Africa where there are so many reasons to be frustrated with the lack of progress there in recent years, economic growth doesn't look very high, they've got very severe problems with electricity distribution, actually, you don't have to peel back that many layers to find reasons to be much, much more optimistic. The government that has taken over there since the late 2010s is really a very progressive pro-business, pro-market government, but they inherited ten years of very, very corrupt, very, very poor policy government under President Jacob Zuma. You've got to think, well, yes it's frustrating for South Africans to have had those issues but the current government is slowly but surely working through a sort of rebuild of the foundations there. It's slow, but it's methodical and it's thorough. And I think it lays a really strong foundation for the next 10, 20 years of growth to come. And you're seeing complete overhauls of state-owned enterprises, you're seeing semi-privatisation of the electricity industry, you're seeing a lot more private capital go into electricity generation, not just ESKOM, the state-owned utility, but also into renewables in South Africa. There's a lot of really, really good things going on there that won't make for quick results, but I think will really set South Africa up to be one of the best performing economies in the world for, say, the next decade. So I think there are a lot of reasons to be optimistic. Obviously in terms of the caution, I think the reasons to be cautious are as they always are which is African governments don't have the luxury of being able to borrow money at the same very cheap rates that developed economies can, and that creates a bit of a chicken and egg problem. They don't have the credit ratings to be able to borrow cheaply. So when they do borrow, it's much more difficult to pay back. And so that cycle makes the job of a Finance Minister in Kenya infinitely harder than the job of Chancellor of the Exchequer in England, in my opinion. So that's always a challenge and something we've always got to be mindful of. How is the government being funded and is that sustainable? Obviously, you know, we do have some oil exporters in Africa and Nigeria being the biggest and many, many more countries with oil and gas reserves about to come online, Uganda, Tanzania, Senegal, Algeria, so a lot of oil and gas to come online, but still many of the countries are oil importers and so sustained high oil prices can be a bit of an issue and something we've got to keep an eye on. But as I said, overall I think many, many more reasons to be optimistic than cautious at this point.

Chipo Muwowo: Now, final question. One thing many people probably don't know about you is that you used to row before you went into managing people's money. So you competed in the Beijing Olympics in 2008 for Team GB and you're a silver medallist. So yeah, I'm curious to hear, you know, do you miss it? And how does that previous experience help you in your job today?

Colin Smith: Thanks a lot for mentioning that and it feels like a very long time ago now, Chipo, that I was rowing back in 2008, but certainly one of the most rewarding and proud things that I've done. In terms of sport, and I think this is true for any very high level sport, obviously there are certain qualities that are required for somebody to be good at sport at a high level and there are qualities like determination and focus and resilience. And obviously in a sport like rowing, a team sport and really a power endurance sport, you then also have a lot of other teamwork qualities, the ability to be coached. So the people that are very, very good at high level team sports generally have a bunch of other qualities that can be usefully applied to other places. So we think about that quite a lot. We think discipline in our business is one of the things that we do well, and obviously as a high-level sportsman you need to be extremely disciplined. Disciplined in how you go about your day, disciplined in how you execute strategies when you're racing or playing a game, so I think that there are a lot of terrific things. And obviously I miss being as fit as I used to be back then. I miss being able to eat 6,000 calories a day instead of the 2,000, 2,500 that I have to restrict myself to now. There are many, many wonderful parts to that I will treasure forever.

Chipo Muwowo: Yeah, fantastic. Colin, it's been an absolute pleasure talking to you. And yeah, thank you so much for sharing your thoughts and insights on investing in Africa.

Colin Smith: Absolute pleasure, thank you.


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