RPT-INSIGHT-Africa makes the grade for richest US university investors – Reuters

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    Mon Jul 8, 2013 2:30am EDT

    * Endowments help to fund scholarships, research

    * Africa offers high returns, diversification

    * Continent attracting long-term investors

    By Tosin Sulaiman

    JOHANNESBURG, July 7 (Reuters) – America’s wealthiest
    universities are venturing into Africa’s fast-growing frontier
    markets in search of outsized investment returns that will allow
    them to offer scholarships, lure star professors and fund
    research.

    For Sub-Saharan Africa, recognition from these deep-pocketed
    U.S. institutions, who have often earned envy among fellow
    global investors for their strong returns, marks a significant
    shift.

    American university endowments – permanent funds of
    educational institutions – pride themselves on spotting new
    investment opportunities early, such as venture capital, private
    equity and natural resources such as timber. Combined, they
    manage assets of over $400 billion.

    A study of 831 endowments by the Commonfund Institute and
    the National Association of College and University Business
    Officers published this year showed their annual net returns in
    the 10 years to June 30, 2012, averaged 6.2 percent.

    In the same 10-year period, returns for the U.S. S&P 500
    stock index were 5.3 percent.

    In Africa, they are seeing many of the trends that played
    out in emerging markets like China, India or Brazil – strong
    economic growth, an emerging middle class, greater political
    stability and improved government balance sheets.

    These are just the attractions that U.S. President Barack
    Obama highlighted on his recent trip to the continent when he
    urged American and other investors to “c’mon down” to Africa.

    “The growth, consumer spending, improved governance and
    disposable wealth, they’re all positive stories,” said William
    McLean, who manages Northwestern University’s $7 billion
    endowment.

    His team is investing in Nigeria and Kenya among other
    countries and recently doubled its exposure to Africa.

    “Our motivations are making some money,” he told Reuters in
    a telephone interview. “You have to look everywhere for growth.”

    It is difficult to know exactly how many U.S. university
    endowments have put money in Africa because most prefer not to
    discuss their investment strategy.

    Wale Adeosun, founding partner at New York-based investment
    firm Kuramo Capital Management, said endowments’ interest in
    Africa began after the 2008-2009 financial crisis. He estimates
    that 10 to 15 percent of these institutions are already
    investing in Africa. Up to 30 percent may be seriously looking
    for deals there, he says.

    “The larger pools of capital are here in the U.S. and you’re
    seeing the interest picking up about exploring opportunities in
    Africa,” Adeosun added.

    Many endowments are required or aim to channel about 5
    percent of their market value to their school’s budget each
    year, to fund scholarships, research and new campus facilities.

    The interest means that Africa is attracting a new class of
    investor – those with unlimited time horizons, in contrast to
    the speculative hot money that poured into the region before
    2008 only to vanish when the global financial crisis hit.

    “It’s a lot more patient capital and … the healthy thing
    about that interest is that it’s likely to withstand the short
    term noise around the tapering of QE (U.S. quantitative
    easing),” said Razia Khan, head of Africa research at Standard
    Chartered.

    Besides offering the possibility of cheaper assets and
    higher returns that have been hard to come by since the global
    financial crisis, Africa along with other frontier markets also
    provides more diversification for the investors.

    “NOT SUCH A SCARY PLACE”

    U.S. endowments’ awakening appetite for Africa is another
    sign that the continent is shedding its past reputation for
    conflict, poverty and aid-dependency in favour of a more
    positive image of progress.

    Lindel Eakman, managing director of private markets at the
    University of Texas Management Company (UTIMCO), told a private
    equity conference in Cape Town earlier this year that Africa’s
    reality is different to what is often reflected by media
    coverage.

    “Contrary to the public television out there, it wasn’t such
    a big, dark, scary place … We are glad to be here,” he said.

    Eakman added that UTIMCO, which oversees investments for the
    University of Texas and Texas A&M Systems, with assets of around
    $25 billion, had made two commitments to Africa through the
    private equity firms Helios and Actis.

    Besides Northwestern and the University of Texas, which rank
    among the ten biggest U.S. endowments, other large schools
    investing in Africa include the University of Michigan, the
    University of Notre Dame and the University of Wisconsin.
    Between them these institutions manage around $50 billion.

    Rockefeller University, a biomedical research institute in
    New York with around $1.7 billion in assets, expects to make an
    allocation to Africa this calendar year and has identified
    outside managers, chief investment officer Amy Falls said.

    For Indiana-based Notre Dame, Africa accounts for about 2
    percent of the $8 billion endowment. This exposure could
    increase to 4 or 5 percent in the next five years, said chief
    investment officer Scott Malpass.

    “We’ve done a lot in China, Brazil, India. As Africa
    continued to evolve it was just a natural area for us to spend
    time there,” he said, adding that rising incomes and the
    improving quality of businesses in Africa were big draws.

    Harvard University, whose $31 billion endowment is the
    biggest in the United States, has been exploring the investment
    landscape in Africa, according to a banking source who said his
    bank was approached by the university a few months ago.

    “There has been some interest,” he said. “They were looking
    to debt instruments and private equity.” According to Harvard’s
    tax filings for the year ending June 30, 2012, the university
    had investments of about $198 million in sub-Saharan Africa, but
    this represented just 0.5 percent of its total investments.

    CHASING 8 PCT RETURN

    Those who have taken the plunge into Africa are treading
    cautiously, concerned about political risk, corruption and the
    relative immaturity of markets in the region.

    “This is a long term process. We’re looking out 15, 20 years
    so we’re starting slow and proceed with caution,” said Tom
    Olson, who oversees the University of Wisconsin Foundation’s
    $2.1 billion endowment, which has commitments with Actis.

    Investors are also gaining comfort from the “slowly
    increasing” number of good quality managers handling deals in
    Africa, said a senior private equity executive who said at least
    five endowments had made commitments to his firm’s latest fund.

    “They expect who they give money to be of the same quality
    as the teams they give money to in the U.S. and Asia,” he said,
    asking not to be named.

    The small size and illiquidity of the region’s capital
    markets are another worry, especially for the richest
    universities whose assets can dwarf the GDP of smaller African
    countries.

    “If everybody goes in and starts trying to buy things it’s
    going to move the prices and grab the value away so you can’t go
    in and take a big position,” said Bill Jarvis, managing director
    of the Commonfund Institute, the research arm of Commonfund,
    which manages over $24 billion for more than 1,500 institutions.

    Kuramo Capital’s Adeosun said universities recognise the
    need to consider frontier markets like Africa if they want to
    meet their return objectives.

    “You have to make 5 percent plus inflation plus expenses,”
    said Adeosun. “They’re all chasing an 8 percent type return.”

    RPT-INSIGHT-Africa makes the grade for richest US university investors – Reuters

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