Alternative assets are the name of the game for Angola's sovereign wealth fund, as it steps in where local banks fear to tread.

Confidence is not a word easily associated with Angola of late. The oil price plummet has left a gaping hole in the government’s budget, the value of the kwanza is volatile, and the country still needs significant levels of investment to remedy deficiencies in healthcare, education, infrastructure and agriculture.

Yet while these problems play out, the horizons of the country’s sovereign wealth fund, the Fundo Soberano de Angola (FSDEA), are expanding. “We believe we are now in an exciting stage in our development, and we are in good shape to make slightly more complex investments,” says its chairman, José Filomeno dos Santos, who is the son of the current Angolan president. “It is true that we are a relatively new fund and that we have a long way to go to fully establish ourselves as a leader in the sovereign wealth fund area. But, we have a clear investment mandate and much scope for growth.”

The complex investments that Mr dos Santos refers to are primarily located in Angola and its immediate neighbourhood. The FSDEA – which was given a transparency rating of eight out of 10 by the Sovereign Wealth Fund Institute in February this year – has been given specific instructions to look for greenfield projects that will improve the Angolan economy and generate benefits for ordinary citizens.

“Our mandate has a strong commitment to investing locally and allowing the Angolan economy to diversify. The investments are longer term, and relatively illiquid and riskier when compared with those we make in international markets, but they promise a higher return. In years to come, these will provide more operational liquidity,” says Mr dos Santos.

Expanding opportunities

In its initial stages, the FSDEA focused on fixed-income investments in international markets – sovereign and corporate bonds that provided low-risk, limited returns. It has since expanded into hotel and energy infrastructure projects, and at the end of last year, it established five new funds that will have a combined investment value of $1.4bn over the next three to five years. Four of these funds will take private equity stakes in local mining, timber, agriculture and healthcare projects, while the fifth will operate as a general regional development portfolio on the hunt for structured equity opportunities.

Mr dos Santos does not expect a struggle to find appropriate projects for these funds. Angola’s natural resource wealth does not rest on oil alone. The country is twice the size of France, with extensive forest regions and mineral deposits, offering lucrative possibilities for the FSDEA’s timber and mining funds. The latter area is particularly promising, with huge tracts of unsurveyed land within Angola’s borders. After the on-again, off-again civil war that ran from 1975 to 2002, Angola has also emerged as a holiday destination and now has a burgeoning tourist sector. There is huge impetus to grow these industries to diversify Angola’s economy and insulate it from future oil price shocks.

Once these new funds are fully up and running, they and other so-called alternative investments will comprise roughly 60% of the FSDEA’s portfolio, with the remaining 40% remaining in highly liquid international fixed-income positions. This balance may seem heavily weighted toward riskier, less sure-fire returns, but Mr dos Santos is happy with the policy. “As well as meeting our core investment mandate, these alternative investments also appeal because they are largely shielded from developments in global financial markets. They are uncorrelated to returns from our international investments, and so in a sense they provide some level of risk management all by themselves,” he says.

Oil connection

As with much else in Angola, the birth and continued existence of the FSDEA is closely intertwined with the country’s oil industry. The idea of an Angolan sovereign wealth fund was first mooted in 2008, the last time a drop in oil prices hurt the national economy. The FSDEA itself was established in 2011 and began making its first significant investments in 2014. Founded with about $5bn of assets under management, it currently receives a stipend from the government’s oil revenues that currently equates to the US dollar value of 100,000 barrels per day, or about 5% of total production. In cash terms, this is thought to be about $3.5bn per year.

With government money so tight in the current climate, that is a significant sum to put into one pot. In return, the FSDEA can provide financial assistance to the government in moments of extreme stress. The Ministry of Finance is authorised to withdraw cash from FSDEA at short notice, meaning that at least 20% of the fund’s portfolio must be comprised of highly liquid investments at all times. The FSDEA is also required to keep 95% of its portfolio in assets uncorrelated to oil price volatility. 

“The main focus of the government is still financing the budget and creating foreign exchange reserves. Wherever there are surpluses they are channelled into the [sovereign wealth fund] to create an additional financial cushion for the future and endorse private-sector investment. We have found there is a lot of potential in Angola and the broader region that requires investment. However, in many instances, banks in the region at large don’t have complete information on the credit risk of potential borrowers and hence tend to be more apprehensive to lend to private projects,” says Mr dos Santos.

Bank lending proxy

The use of the FSDEA as a proxy for bank lending is a key policy of the Angolan government. Though the country’s financial sector has grown swiftly over the past decade or so, as have many others in Africa, it is still unable to provide significant funding for private sector projects. Given the low industrial, educational and infrastructural base found in Angola, these projects often involve high up-front costs and years of financial commitment before profits are returned. Foreign banks do not yet have a hefty enough presence in Angola to fill this funding gap. Nor is there as yet an abundance of private equity investors willing to put money down on such projects.

Mr dos Santos believes this is where the FSDEA and other similar funds across sub-Saharan Africa can step in, providing the initial investment, private equity or otherwise, to allow projects to get off the ground.

The current size of sovereign wealth funds in the region is generally rather small, however. South Africa runs a very large public investment corporation, which handles state pension payments and other key investments, though whether this can be considered a pure sovereign wealth fund is open to debate. Aside from this, no sub-Saharan African sovereign wealth fund makes it into the global top 30. Botswana’s is the biggest, with $6.9bn of assets under management funded mainly by diamond and other mineral wealth. Angola’s is the second largest in the region, with the likes of Nigeria, Ghana and Senegal running significantly smaller funds.

“There is a growing role for sovereign wealth funds in Africa. The Nigerian and South African funds have a similar approach that emphasises local investments and local improvements,” says Mr dos Santos.

Cross-border investment

Inter-African investment is on the rise, growing by about 30% each year between 2007 and 2013. Much of this activity has been unleashed by a higher savings rate among ordinary Africans, and a loosening of pension fund rules surrounding cross-border investments in many countries. However, much investment does not fit the profile required by the greenfield projects that await funding all over Africa. For example, most pension funds, faced with predictable, long-term liabilities, look for mature projects with easily calculable returns. The relatively speculative, start-up equity investments that the FSDEA specialises in are off their radar.

“As far as inter-African investment activity is concerned, a lot of it is debt-driven, which deters a lot of projects that need private financing to get going. That’s why we decided to set up a structured equity/mezzanine fund to get projects up and running before they need to access senior debt,” says Mr dos Santos.

Private equity investment in Africa is on the rise, but it has a huge amount of ground to make up. In 2013, $3.3bn of private equity funds were raised for African purposes in 2013, compared with $5.6bn for Latin America and $19.8bn for China alone.

Another concern for investors is the virtually non-existent foreign exchange market in Africa. Currency values on the continent are often exceptionally volatile, and some countries, such as Angola, do not permit foreign investors or companies to repatriate local currency earnings. Hedging currency exposure is often either impossible or exceptionally expensive. In October last year, the Johannesburg Stock Exchange launched futures contracts on Zambian kwacha, Nigerian naira and Kenyan sterling for the first time, but there are doubts over whether there is sufficient volume demand to get these products off the ground.

“Africa needs risk takers. Our financial markets are incipient and relatively illiquid. It is difficult to attract entrepreneurial types that can put private capital into projects, but interest in this area is growing,” says Mr dos Santos.


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