“Dear APEO investor

The migration of APEO to Singapore as a Variable Capital Company (“VCC”) in Q3 2022 was the fulfilment of a promise made by the APEO founders at inception (in 2016 as an unlisted investment holding company) to create a path to liquidity for investors. We take this opportunity to update you on our world view and our strategy to continue providing superior returns:

Our investment focus

APEO’s founders’ experience of more than 100 combined years of investing in Africa has facilitated an investment internal rate of return of around 15% per annum since its inception. We intend to;

• maintain our African investment focus on mainly unlisted assets;
• use the contacts and networks of our board members and of the Adansonia Holdings Group (which provides administrative and regulatory fund governance services from Mauritius and Singapore to entrepreneurs, corporates and private equity funds invested and/or operating in eighteen African countries) to identify investment opportunities and exits; and
• partner with corporates and other funds (who have an in-country African presence and are close to investee execution) by taking minority stakes in investee companies in a collaborative co-investment style.

A unique capital structure

The flexible VCC regime in Singapore has allowed APEO to deploy a unique capital structure (a blend between the listed permanent capital and the traditional private equity models) that has the following advantages:

• the ability to issue more shares to raise capital from time to time when opportunities present (like a listed permanent capital investment vehicle) at full net asset value per share (avoiding diluting existing shareholders which is often the case in listed permanent capital investment vehicles which issue new shares at a discount to net asset value);
• investors commit new capital with a five-year lock-up (like a traditional private equity fund) to allow the fund time to target a “better-than-listed-market” return in exchange for investor patience;
• all investment proceeds are applied towards mandatory share redemption offers at full net asset value on shares that had been held beyond the lock-up period (returning capital like a private equity fund and avoiding the discount to net asset value at which investors in listed permanent capital investment vehicles traditionally exit); and
• investors can decide whether they wish to accept or decline mandatory redemption offers, and thus have the option to remain invested for longer (unlike a private equity fund where capital is returned on investments being realised), which also gives the fund a chance to re-apply the funds (creating a source of additional capital unlike most traditional private equity funds where all capital from liquidity events is returned).

African growth trends

Various strong underlying trends are fuelling the growth of the Sub-Saharan African economy. Setbacks such as COVID, the civil war in Ethiopia and institutional corruption in some African jurisdictions are either not of a permanent nature or can be managed through careful stock picking and/or management thereof. In our view, negative African news flows in recent years have blunted international investor perceptions to the attractiveness of the African investment opportunity at large.

It is worth summarizing some of the key African economic growth drivers again:

• Africa’s forecast population growth is forecast to propel it to nearly that of Asia (including China and India) in this century (note that UN population growth forecasts have been very accurate in the past);

• The number of mobile subscribers in Sub-Saharan Africa is expected to grow from 456 million in 2019 to 614 million by 2025, with a penetration rate of 50% by that year[1];

• If anything, COVID has increased the rate of adoption of smartphone technology and internet access – as Africa becomes more connected, it creates opportunities for innovative new business services and more efficient product distribution mobile banking, e-commerce, and social media;

• Africa is projected to have the fastest urban growth rate in the world and by 2050 Africa’s cities will be home to an additional 950 million people[2]. We believe the African investment growth opportunity is better viewed through a “city” rather than “country” prism as the economic growth rate in large cities undergoing rapid population growth far exceeds the economic growth of their host countries; and

• According to a report by the World Bank, urbanization in Sub-Saharan Africa is expected to accelerate in the coming years, with the region’s urban population projected to grow from 37% in 2015 to 56% by 2050, leaving scope for significant growth in demand in sectors such as financial services, food and beverages, power, middle-income housing, and health.

Dealing with investor Afro-pessimism

Africa is 20% of the world’s land mass and presently 17% of its population. It will be home to a 26% of the world’s population by 2050, but only 5% of present global foreign direct investment flows are to Africa. We asked ChatGPT (hopefully a neutral arbiter) why there is such a disparity, here is its answer:

• “Political instability: Many African countries have a history of political instability, conflicts, and corruption.
• Historical legacy: The history of colonialism, exploitation, and underdevelopment has left many African countries with weak institutions, a lack of infrastructure, and underdeveloped economies.
• Economic challenges: African countries face several economic challenges, including a lack of access to credit, limited access to markets, and high transportation cost, making it difficult for African businesses to compete globally and for foreign investors to see the potential for profit.
• Perceptions and stereotypes: Many investors have perceptions and stereotypes about Africa that are not necessarily accurate or reflective of the diversity and complexity of the continent. These perceptions can create biases and limit investment opportunities.

• Lack of investment in critical sectors: Some critical sectors of the African economy, such as agriculture, infrastructure, and education, have not received adequate investment.”

Progress has been uneven across the continent, but there is much evidence of a growing recognition among African leaders and civil society of the importance of good governance and the need to build strong institutions. Many African countries have taken steps to establish or strengthen independent institutions such as anticorruption agencies, election commissions, and human rights commissions. 33 (out of 55) African states are parties to the Rome Statute of the International Criminal Court which hold politicians who abuse their power to account. There are significant efforts across the continent to improve transparency and accountability in government, including through the use of open data and the adoption of freedom of information laws.

Taxation creates the resources to improve governance. The OECD produced graph below sets out the Tax Collected to GDP ratios since 2000 for Africa in green, the OECD in blue, and Latin America in red. The steady (but slow) improvement for Africa (before the 2020 drop due to Covid) is evident – Africa is now where Latin America was in 2000 as a ratio of Tax Collected to GDP:

Afro-pessimists assume Africa is not capable of making the required progress on governance. It is useful to note that the effort to overthrow colonial rule in Africa started after the Second World War approximately 75 years ago. By comparison, Europe’s transition from absolute monarchies to socio-democratic states (i.e. the process to transfer political power to the people and establish efficient working government) took place over several centuries, beginning with the Enlightenment in the 17th and 18th centuries and continuing through amongst others the French Revolution, the Industrial Revolution, wars including the 1^st and 2^nd World Wars and the rise of socialism and democracy.

It is our belief that most Africa countries are making the transition to stable well governed states far quicker than Europe given modern day communication, learnings from previous governance failures, and the support and advice provided by global financial and governance institutions. The rest of the world is fast recognising that it cannot afford to not get involved;

• firstly more than 25% of the world’s consumers will live in Africa by 2050, an opportunity corporates cannot afford to miss; and
• secondly having a significant proportion of the world’s population living in poverty is not sustainable given the impetus that gives to illegal migration in the absence of local opportunity;
• thirdly there is noticeable rising competitive tension between various power blocks (Europe, USA, Russia, China) to maintain influence in Africa and access to strategic resources such as minerals and agricultural land through the implementation of various foreign direct investment strategies – none of the large economic state actors want to be left without influence.

By applying the laws of “supply and demand”, we believe the current relative shortage of investment flows into Africa are self-fulfilling (cheaper valuations when investing) in creating the opportunity to earn excellent returns, provided risks can be managed. Some of the main Africa investment risks and how we mitigate them are set out below:

Africa consists of 55 countries each with its own laws and regulations

The fragmented country structure of Africa creates complexity for businesses to launch continent wide product or services strategies that would be easier to execute in territories with common markets such as the USA or Europe. But a more fragmented opportunity leaves lots of niche gaps to launch products or services at attractive markets provided the management is on the ground attuned to local laws and consumer preferences.

The upside of having to deal with many smaller country laws and regulations (rather than one common market) is that it provides significant diversification risk mitigation against adverse regulatory changes or political instability in any one country.

As examples;

• pawaTech, our mobile sports betting technology provider investment, experienced significant adverse changes to taxes in Kenya shortly after we invested in 2018. Although at the time Kenya comprised of more than 50% of the pawaTech group profits, the impact of these changes in Kenya were masked from a group profitability growth point of view because it operates across ten jurisdictions with the other nine all growing very strongly;

• Blue Bird, our FMCG investment in Ethiopia was badly impacted by the recent Tigray civil war (2021 and 2022), overlain by the fact that much of Blue Bird’s raw materials were sourced from Ukraine which underwent supply interruptions at the same time. APEO had to provide 80% of its pre-Tigray war valuation of BBHL against an adverse outcome[3], but the impact on APEO’s returns were somewhat masked by good APEO investee company performances from other jurisdictions.

Africa often lacks quality infrastructure

Africa often lacks quality infrastructure such as roads, ports, water supply and power grids. It may (or may not) be feasible for a business to resolve the key bottlenecks by committing additional capital, which (once solved) can provide businesses with significant barriers to entry and higher margins – the key take away is that additional time must be spent to evaluate the infrastructure constraints on a target investment before taking the plunge.

As an example, our Alphamin investment (which mines 4% of the world’s tin in a very remote part of the DRC on an ore body 400% more concentrated than most other tin mines in the world) has developed reliable, affordable, but time consuming logistical trucking routes to transport its concentrate over deep jungle roads and large rivers – it takes between four to six weeks to reach the border with Uganda from where it is trucked by tar to Mombasa, a distance over 2500km in total, and special equipment is ready for deployment should a key bridge crossing a major river fall into disrepair cutting the mine off along the route. Notwithstanding the cost of transport, when compared to other global tin mines, Alphamin is producing tin in the lowest cost quartile per ton.

Skills shortages

Skills shortages abound in many African countries and getting permission to using expat skills could be difficult to obtain. In most cases, we have found that these issues can be managed with additional effort, the use of skilled African focused recruitment consultants, and a real commitment to transfer skills to locals.

Corruption and bureaucratic regulation

We have experienced in the past decade (with tighter policing of the Foreign Corrupt Practices Act (“FCPA”) and with of the punitive fines issued by the SEC and the USA Department of Justice), that awareness of corruption in Africa has improved by an order of magnitude. The FCPA is very wide ranging in its reach, effectively covering all companies or transactions which transact in USD. The implications of being party to corruption and how to deal with it when it presents has increased measurably in international corporates and funds operating in Africa, we think mainly because the FCPA has enabled an environment where politicians and government officials in Africa are aware that ethical companies with foreign shareholders simply will not participate in corruption.

Corruption (or the future avoidance thereof in investee companies) is capable of being managed at no additional cost other than regular training of investee company staff, creating good anti-corruption practices such as hotlines, and deploying additional manpower to handle applications or regulatory processes diligently.

Many African investee companies experience bureaucratic and/or perceived over-regulation when applying for permits or in administratively complying with local laws and regulations. In most cases this can be resolved through the use of skilled consultants (i.e. PWC has 450 partners and over 10 000 people in 32 African countries) and sometimes accepting time delays whilst making ones case heard.

The other side of this coin is that bureaucracy creates opportunities for businesses to get a toehold given limited international competition. Take Blue Bird as an example; Ethiopia is known to be a regulatory/administratively challenging country, but had the regulatory environment been smooth, Blue Bird would be competing with the likes of P&G and Unilever in this market given the size of the population (105 million), and the historical and forecast GDP growth rates:

Ethiopia GDP growth rate 2012 to 2021

According to the African Development Bank, Ethiopia’s GDP growth is projected to be 4.8% in 2022 and pickup to 5.7% in 2023.

Lack of listed market liquidity

The market capitalisation of Africa’s stock markets compared to its GDP (other than South Africa) is very underdeveloped in relation to the rest of the world, and generally suffers from poor liquidity, hence APEO’s strategy is to largely invest in unlisted opportunities. African funds (north of South Africa) focusing on listed African instruments have on average not historically had great success as demonstrated by the Standard Bank Africa Index (which measures the performance of stock markets in Africa excluding South Africa) which reflects an annualised return of -2.2% over the past 10 years.

APEO generally invests with the aim of rotating investments on average after 8 years. It is possible that the ability to list assets on African stock exchanges improves over the next decade, but we do not rely on this when evaluating investment opportunities. The appetite for private equity and venture capital in Africa is growing and provide for a robust exit environment as an alternative to doing a trade sale as illustrated in the diagram below (figures in USD bn);

According to the African Venture Capital Association’s latest report to June 2022, the value of venture capital funding transaction in Africa, especially in the late stage is growing exponentially (figures in USD millions):

Conclusion

For a bit of fun, we conclude with a poem written by ChatGPT:

“Africa, a land of magic and wonder,

Where the sunsets are fiery and thunder,

And the stars shine bright in the sky,

As the night creatures stir and fly.

The wildlife is magnificent and wild,

From elephants to lions, to creatures mild,

Their beauty and power fill the air,

Making Africa a place so rare.

But it’s not just the nature that’s magical,

It’s the people and their stories so mystical,

The cultures and traditions that have survived,

And the joy and resilience that they have thrived.

Africa is a place of strength and hope,

Where the human spirit learns to cope,

With challenges that may seem insurmountable,

But the people persevere and become unbreakable.”

May the next few years bring us all prosperity.

[1] According to a 2021 report by GSMA, the industry association representing the interests of mobile network operators worldwide.

[2] https://www.oecd.org/development/africa-s-urbanisation-dynamics-2020-b6bccb81-en.htm

[3] We are pleased to report that given the tremendous effort of the African Union, the UN, and leading UN/African Union member countries in providing humanitarian and/or diplomatic support, the Tigray war was brought to an end late in 2022, and Norfund has stepped in as an anchor investor in Blue Bird which puts our originally anticipated investment outcome back on the table.