The failure of finance theory has led to massive distortion in risk perceptions and asset allocation globally which has impeded capital flow to private markets in Africa.Dr Booth is a leading expert investor in emerging markets, author of ‘Emerging Markets in an Upside Down World’; Chairman of New Sparta Asset Management; co-founder of Ashmore, UK. He is a featured speaker at the upcoming Finance & Investment Forum at African Utility Week in May.
Let’s start with some background about New Sparta and your role there?
New Sparta Asset Management (NSAM) is a specialist emerging market investment manager, with interests across energy, infrastructure and financial services in developing economies. In 2016, New Sparta Energy (NSE) was established by NSAM to develop renewable power assets in sub-Saharan Africa. NSE has a team of highly experienced professionals who have collectively spent decades developing power infrastructure in Africa.
What is the most exciting project you have worked on in Africa so far?
African Plantations for Sustainable Development (APSD) in the Ashanti region of Ghana. This is a hugely scalable biomass project using fast-growing eucalyptus as feed stock. It brings huge socio-economic benefits to the local communities and environment as well as offering baseload renewable power.
What did you learn from the investments that did not do so well?
Specifically concerning power generation in Africa: there have been a number of mismatches in the past where funds have been launched with unrealistically high return targets and over-restrictive guidelines. This has been driven to some extent by the expectations of institutional investors, but the result has been funds which cannot get invested.
Project-specific risks revolve around 3 main issues: schedule, budget, and project selection.
a) Schedule: sub-Saharan Independent Power Producer agreements (IPPs) are notoriously slow to close, so finding people who can 'champion' your project is critical. Poor transport infrastructure can also present real challenges.
b) Budget: If a project is significantly behind schedule the budget consequences can be significant, and a lot of developers are unreasonably aggressive in their initial budgeting process.
c) Project selection: There are numerous examples of projects where developers did not understand the risks up front. Large hydro is a good example, especially where significant water storage is involved and/or significant numbers of people need to be displaced, hence our NSE focus on smaller hydro and wind/solar. But even with the wind and solar projects there are typically issues around land tenancy. These need to be clearly understood and stakeholders fully engaged before real money is spent.
The conclusion is to be careful about the projects you dedicate resources to, honest about their real cost, and then manage the budget and schedule closely.
What in your view is the biggest misconception that people have about investing in Africa?
Risk. Risk is perceived as simple and linear, and it is not. Most of the big catastrophic and highly correlated risks in the investment universe are now in the developed world. For those with long-term horizons (i.e. most end investors, but not necessarily their agents and financial intermediaries) avoiding short-term volatility is much less important than avoiding large permanent loss.
The resultant macro-economic imbalances, political denial, excessive debt levels, increasingly homogenous investor bases, and herding in the developed world should be counteracted by more investment in private markets in Africa and elsewhere in emerging markets. The purpose of this is to reduce risk – not simply to diversify or gain extra return.
Which countries on the continent are doing the right things? Where are the opportunities?
The countries that have instituted formal auction programs under a transparent and enabling environment stand out. For example, South Africa’s renewable program has been a success. Ghana has also done well due to good, relatively stable overall governance and transparent sector policy liberalization. Their grid connection rate of 75% is among the best on the continent.
Nigeria has also made progress, though there are still transparency issues. Kenya’s geothermal development has been a success and their Feed-in Tariff program solicited many proposals from the private market. There are also a number of countries where attractive negotiated contracts can be achieved: Tanzania and Rwanda; to an extent, Uganda; several in West Africa, including Benin and Togo; and in Southern Africa, such as Malawi, Namibia, Botswana and Zambia.
What will be your message to attendees at the Finance and Investment Forum expect at AUW this year?
I shall be talking about the failure of finance theory, which has led to massive distortion in risk perceptions and asset allocation globally. This has impeded capital flow to private markets in Africa, to the detriment of both African economies and global savers.