Weekly Viewpoints on Sustainable Investment
In this week's note a view on private equity in Africa and academic research on sustainability in Cape Town.
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| John Oliphant, Head of Investments and Actuarial at the Government Employees Pension Fund of South Africa, gives morning keynote to kick off African Investment and Funds Management Forum at Johannesburg Securities Exchange 23 July 2013 |
PRIVATE EQUITY AS GROWTH CAPITAL
Private equity is an important asset class in frontier markets with growing economies. There are 2 types of private equity, firstly financial engineering (made famous by the novel based on the Nabisco deal in the 1980s Barbarians at the Gate: The Fall of RJR Nabisco), and secondly growth capital, financing high growth medium-sized companies' expansion. In many frontier and emerging markets PE is more often growth capital than financial engineering because capital is in demand, medium sized companies may be high-growth, and debt markets are no appetite for gearing. So what of PE in Africa, is it helping to grow investment in the continent? Certainly PE in Africa is different in several ways. Firstly, a sizeable chunk of the capital for PE has been supplied by development financing institutions (DFIs), finance arms tied to governments such as Canada, The Netherlands, UK, France or the USA. Secondly, due in large part to the large chunk of assets being supplied by Limited Partners (Investors), at least one-in-two dollars in assets of the fund invested by General Partners (Fund Managers) are filtered for ESG factors. This implies the private equity asset class in Africa is a leading category integrating ESG factors. Thirdly, Africa remains on the margins of the investment universes of many global investors and for the private equity asset class. Africa makes up just 2% of global GDP, 1% of financial markets capitalization, but 13% of population, including a large portion of young citizens. While Africa has gone from being considered a hopeless continent to a hopeful continent, the reality beneath the hype is that most sovereign ratings reflect risk concerns, the absolute size of economies is small, and the available deals are limited. Fourthly, the patchy governance of financial markets in some African countries fail to provide a firm footing for investors worried about the rules of the game, and with doubts about ever seeing their capital again. Finally, the perception arbitrage exists - some benefit from the vacuum of accurate, fresh and plentiful data-points, others are frustrated by it. Today have clean data on companies operating in Africa is the comparative advantage, not even the analysis of it.
Tracking PE demands hard to get data. industry surveys and reports are useful, although LPs and GPs may be exhausted from providing responses! Helping to add some real new data has been the RisCura Bright Africa report. A recent Financial Times feature on PE head at RisCura Fundamentals explained the value of better metrics tracking valuations and deal pricing. A final comment on PE in Africa. My experience suggests that more capital will be flowing, but the timing is unknown. PE fund managers like Carlyle have been putting heaps of CO2 into the atmosphere at 37,000 shopping the Africa story and their new fund. It is a marathon. On the other hand, GEPF has committed $500m to two PE Pan-African funds investing outside South Africa (PAIDF II and PIC pan-Africa ex-South Africa) as John Oliphant explained at this week's Africa Investment Funds and Asset Management Forum 2013 AIFAM2013 at the JSE (see tweets on #AIFAM2013).
GOOD WORK PUTTING SOUTH AFRICA ON THE SUSTAINABILITY ACADEMIC MAP
I was privileged to be invited to join last Friday’s Ph.D research workshop hosted by University of Cape Town Graduate School of Business to learn and share on research in the sustainability theme. The theory of business is examined in multiple ways. Some have been over-research as academics strive to carve out their niche and their legacy. Other areas are under-researched, sometimes because the data does not exist (often the case in developing markets). You are reminded its academic when an early question is: “what is theory”?! Insights from Professor Tima Bansal, Canada Research Chair, Richard Ivey School of Business, University of Western Ontario, Canada, were compelling, including future research work on time, space and scale and their impacts on business (I was invited but unable to attend the University of British Columbia (UBC) Faculty of Law and the Responsible Investing Initiative seminar: It’s Time: The Temporal Dimensions of Responsible Investing on 20-21 June 2013). Firstly, Tima's appreciation for Ralph Hamann for his good work in promoting academic work in sustainability. Ralph has helped spur my further thinking on research methods, assumptions and frameworks, been a great supporter for different projects including the Access to Nutrition Index (www.accesstonutrition.org) and spoke at the launch event series for AfricaSIF.org in 2010 VIDEO. He has been responsible for exposing African researchers to leading academics, including Professor Jonathan Doh from the Villanova Graduate School of Business, my MBA thesis advisor and co-author. A good man for sustainability in Africa, Secondly, Tima reflected her ongoing academic work with Andy Hoffman, and their ongoing academic debate on if/how sustainability can only thrive as its own field versus it needs to be an element of the major functional business areas. This debate reflects the similar questions I have been asking, and have revisited in recent conversations with sustainable investment practitioners in London, New York, Boston and Washington DC.
Thirdly, the critical path for academic careers demands publishing articles in a limited number of journals. It is both a qualifier, and a bottleneck. Any new academic research ideas or approaches must be vetted by “incumbent thinkers”. It does not seem to be a place for innovation. The emphasis is on extending current theory, not for understanding phenomena. But the positive news is how there is now a “thick pipeline” of qualitative research explicitly exploring the environmental implications of business and its operations. Finally, Tima's insights on the leading journal American Management Journal were helpful, especially her promotion of research from frontier markets and developing countries seeking to write academic papers with lessons that are generalizable from, for example, Kenya. Academic contributions to moving forward sustainable investment are critical. I hope the Journal of Sustainable Investment and Finance grows. Just this week I pulled in the new (unpublished) work by Andreas Hoepner et al at University of St Andrews on ESG in China using RepRisk data that won the FFR research award in September 2012. Ahead of the PRI event in October, the role for a PRI Academic Network is being explored by Robert Harding at PRI and Dominique Douf. The objective of the PRIANA is to support the work of the Principles for Responsible Investing Academic Network (PRIAN) by fostering a network of scholars, investors, practitioners, policymakers, regulators and students interested in responsible investment (RI) and environmental, social and governance (ESG) issues in Africa. We need so much new thinking, new systems thinking, and good research. Let’s hope the research pipeline grows, for academics and PE fund investors.
Do good work on sustainable investment that matters.
Graham Sinclair
@esgarchitect
linkedin.com/in/grahamsinclair
Skype: graham_sinclair
SinCo - Sustainable Investment Consulting
SinCo designs ESG architecture for long term sustainable investment that matters.
www.sincosinco.com
@SinCoESG
Based on my work, experience and interactions, all views and opinions expressed are those of the author and do not reflect the named individuals, institutions or SinCo, it's clients or services providers. No mention suggests endorsement. This commentary does not constitute investment advise. Issued by SinCo to professional investors and stakeholders for information only and its accuracy/completeness is not guaranteed. All opinions may change without notice and may differ to opinions/recommendations expressed by other business areas of SinCo. SinCo may maintain positions and trade in collective investment instruments referred to. Unless stated otherwise, this is not a personal recommendation, offer or solicitation to buy/sell and any prices/quotations are indicative only. SinCo may provide sustainable investment architecture and other services to, and/or its employees may be directors of, companies referred to. To the extent permitted by law, SinCo does not accept any liability arising from the use of this communication.
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