Moving into frontier territory – investors look to Africa


Despite the prevailing economic uncertainty being caused by COVID-19, African markets are in recovery mode. Societe Generale Securities Services [SGSS] looks at the main developments now underway across the key African markets together with some of the challenges they pose to investors.

Investors scope out Africa

Persistently low and negative interest rates – along with overpriced equities – in the major developed markets are forcing institutional investors to rethink their portfolio compositions - with greater prominence now being placed on higher-yielding emerging and frontier economies. After suffering from a COVID-19-induced contraction of 2.1% last year, real GDP [gross domestic product] in Africa is projected to increase by 3.4% in 20211. The economic rebound and the introduction of positive market reforms in a number of countries is helping convince investors to bolster their Africa-wide exposures.

Now sitting on record amounts of dry powder, the private capital industry – including private equity and infrastructure - are increasingly scoping out investment opportunities across Africa. Data suggests that African private equity deals totalled $700 million during the first half of 2020, which is broadly on par with 2019 over the exact same time horizon2. According to international law firm White & Case, the majority of private equity transactions inside Africa have been focused on healthcare and financial technology. With the abundance of highly successful African financial technology companies - especially in the online payments world - it is expected that private equity’s interest in this dynamic sector will continue to increase well into 2021/22. Meanwhile, infrastructure investment in Africa remains robust, with managers earmarking funds for traditional and renewable energy projects. Despite the initial COVID-19 shock, it is clear private capital investments into Africa are on the ascent.

Infrastructure reform as a liquidity enabler

Although countries such as South Africa, Kenya and Nigeria have historically been among the most heavily traded African markets by foreign equity investors, momentum is gathering elsewhere too, most notably in Cameroon where new regulations have been enacted to encourage further IPO [initial public offering] activity. Trading is also being fuelled by the growing consolidation between market infrastructures across different countries. The establishment of regional infrastructures allows for the pooling of liquidity into a single location, instead of having it spread too thinly across multiple, smaller markets. For instance, the CEMAC (Central African Economic and Monetary Community) countries – comprising of Cameroon, Central African Republic, Chad, Gabon, Equatorial Guinea and the Republic of Congo –all have their own collective stock exchange - BVMAC – which has helped drive liquidity into these markets. Such consolidation can help attract international players with SGSS opening up a branch in Cameroon in 2020 after BVMAC’s merger with Douala Stock Exchange.

Other initiatives designed to attract liquidity into Africa’s fragmented equity markets include the AELP (Africa Exchange Linkages Programme), a cross-border trading and settlement link involving the stock exchanges of Morocco; Egypt; South Africa; Kenya; Mauritius; Nigeria and BRVM. Such programmes are likely to stimulate global investor activity across these markets post-pandemic.

Overcoming custody risk

In frontier markets such as those in Africa, it is vital that investors and intermediaries select local sub-custodians which are well-risk managed and sufficiently capitalised. In a handful of markets, local brokers are, however, sometimes the only custody option available to foreign investors. These counterparties are often seen by investors as being too risky, as local providers may not have adequate risk controls or balance sheet capital strength.  In the context of the strict liability provisions imposed by UCITS3 V and the AIFMD4, many institutions will simply not want to incur the risks of leveraging a local broker. Should investors engage with an international sub-custodian, they will need assurances that their providers are committed to the domestic market as well. This comes following a number of recent high-profile withdrawals by sub-custodians from certain regions. Moreover, it is critical that investors and intermediaries work with providers with deep expertise and knowledge to support them in highly complicated and at times risky markets.

SGSS is a regional African provider of local custody in 14 countries in Northern, Western and Central Africa.  It is operated out of Societe Generale’s fully licensed banking subsidiaries in these countries. The SGSS Master Agreement Structure offers investors a best of breed solution to mitigate these risks in certain African markets. A built-in parental indemnity from the Societe Generale Head Office in France is accompanied by country schedules which are appended to cover markets where SGSS provides sub-custody.

Markets to watch: Morocco

As well as being an attractive investment destination, some African markets are even developing their own funds regimes as they look to strengthen and diversify their financial markets. Morocco, for example, first launched its Property Investment Mutual Funds [OPCIs] back in 2019. The OPCI is a fund structure that enables investors to access Morocco’s burgeoning real estate market. Put simply, OPCIs let investors procure units in an investment scheme largely comprising of real estate assets, while also limiting the constraints related to investment size; concentration and liquidity risk. Beyond domestic institutional investors, OPCIs are now targeting foreign institutions. In order to win mandates, operators are stressing that OPCIs are subject to rigorous regulatory oversight and implement best in class risk management practices. For example, OPCIs leverage depositary providers - like SGSS in Casablanca – who play an instrumental role in monitoring fund investment processes and the transparency of the investment vehicles. The OPCI is likely to strengthen Morocco’s reputation as a leading African domicile for funds.

Markets awash with opportunity

Investor interest in Africa is on the rise, and it has been accelerated by a number of positive market reforms; infrastructure consolidation and the development of innovative fund structures, at least in Morocco. Despite the opportunities, Africa does pose risks. It is crucial investors and intermediaries work with global providers, such as SGSS, who have excellent networks and understanding of these frontier markets.


Jean-François Marchand, SGSS International Country Supervisor for Africa, and Duncan Smith, Senior Sales & Relationship Manager.


AFDB – [March 12, 2021]  Africa Economic Outlook 2021

White & Case [April 5, 2021] Private equity In Africa: Trends and Opportunities in 2021

UCITS: Undertakings for Collective Investment in Transferable Securities

AIFMD: Alternative Investment Fund Managers Directive

Jean-François Marchand SGSS International Country Supervision, Africa & India Societe Generale Securities Services