Enko Capital: Providing Asset Management Solutions to African Institutions

Interview with Cyrille Nkontchou, Co-Founder and Managing Partner of Enko Capital Management

What is your assessment of the sector in Africa? What are the main trends in 2019?

We see ourselves as part of the asset management industry. Enko Capital is an Africa-focused asset management business which I started in 2009 with my brother, who is also my partner. My brother is based in London and I am based in South Africa. Essentially, what we want to offer is asset management solutions to African institutions. We are taking a very holistic approach to asset management. We offer several products. First is the debt fund that invests in debt securities across Africa which is managed out of London. Then, we have a listed equity fund that invests in listed equities across Africa. Finally, we have a private equity fund that I manage with the team based in South Africa. We offer institutions or high net worth individuals a platform through which they can choose the type of investment they want to make, but they all focus on African securities.

Is there a lot of competition in the sector?

In Côte d’Ivoire, we have recently opened an asset management business hoping to help institutions locally to better manage the assets they have in country. The next step will be working closely with the regulator to allow them to potentially invest part of their money outside of their home country to achieve further diversification.

It is a very interesting sector for a number of reasons. First of all, we have found that there is a lack of a culture of asset management in Africa. Even for institutions like pension funds who usually are the key players in asset management, in Africa, we find that they are actually quite behind compared to international standards. So, we see a great opportunity in mobilizing local funds. There are two sources of funds from asset management: foreign source of funding that is available through development agencies and a couple of funds that are specifically geared toward emerging markets, but really, we want to put the most emphasis on mobilizing local sources of funds. That is where we see the opportunity. That includes retirement funds and high net worth individuals locally. Part of the big constraint we find is that the asset management industry in Africa currently is very localized in the sense that, for example, a pension fund or an insurance company in Côte d’Ivoire would mainly look at an opportunity within Côte d’Ivoire. They would not look at opportunities across the continent. A key factor of asset management is diversification. You do not want to put all your eggs in one basket. You want to put your assets across multiple countries because you face many risks such as currency risk and political risk and the way to mitigate that in asset management is by spreading your investment. That is where we come in because we can offer investment solutions across Africa. If you are an institutional investor in Côte d’Ivoire, for example, instead of putting all your investments in Côte d’Ivoire, you should actually spread them across Africa. It is even possible to invest some of it offshore. That is really where we see our added value.

Why are investors not open to that sort of idea initially?

The key hurdle is actually regulatory. For example, if you take the case of insurance companies, the regulation at the moment prevents them from externalizing their funds. If you are an asset manager or an insurance company in Côte d’Ivoire, you cannot invest in South Africa or Kenya because the regulation prevents you from doing so. It is counterintuitive because by doing so, it actually penalizes the return. If you cannot achieve diversification, if something goes wrong in your country of origin, then there is no way to lay off that risk. That is something that we hope can change. We are working closely with the regulator to try to change that to allow that at least a certain percentage of the assets be invested in funds that provide more diversification.

So, that means that at the moment you cannot offer an international scope or the full scope of your services.

There is not only scope to the investor outside of the country, but also to better invest within the country. Because you do not have such a sophisticated investment culture, for example, in a country like Côte d’Ivoire, most of the assets are still invested in real estate or government papers. It is fine, it is safe. But in terms of return, you cannot provide super return. You have to diversify assets across the types of asset classes. You cannot have most of your investment just in one asset category. In Côte d’Ivoire, we have recently opened an asset management business hoping to help institutions locally to better manage the assets they have in country. The next step will be working closely with the regulator to allow them to potentially invest part of their money outside of their home country to achieve further diversification. The issue is not just geographic diversification, but also diversification in terms of asset classes. So, not just investing in real estate and government bonds, but also, for example, in listed and private equities and other asset classes.

Can you explain your three funds in detail?

In total, Enko manages about 500 million dollars in asset management, the bulk of which is from the debt fund managed by the team out of London and headed by my brother and partner. The Enko Africa Debt Fund takes advantage of the opportunities that exist in the debt market, which is actually the largest market in Africa, interestingly. The equities market is still fairly underdeveloped so there are a lot more assets available on the fixed income side. Part of this is fueled by the government which, in order to fund its activities, raises capital from the debt market. The second fund we have is much smaller, which is the listed equity fund. We invest in listed equities, stock markets across Africa. There are actually 25 stock markets in Africa. People do not realize how many stock markets are available. The only issue is that if you look at the debt to GDP ratio which gives a good sense of how developed they are, in Africa it is about 20%, whereas in South Africa and elsewhere it is considered that the market is mature when you pass 100% or when the value of the total stock market is about the same size as the GDP. So, we are quite far from that in Africa and there is still a lot of room to grow. That is the reason why one of the new family of funds that we are planning to open this year will be an IPO fund which will be a fund that only invests in companies that want to list on the stock exchange. Having that dedicated pool of capital will result in more companies going into the stock market. It will be called the Enko IPO Fund. We are in advance discussions with some potential institutions and anchor investors for that fund. The last fund that we manage is the Enko Africa Private Equity Fund which is a private equity fund to invest in companies that are private but who have the potential to list in the future. The fund is now fully invested. We have made seven investments, quite spread out between insurance companies in Zambia and Nigeria ; we have invested in a mortgage bank in Nigeria, a logistics company in east and southern Africa, a software and education company in Kenya, and a commercial bank here in Côte d’Ivoire (Ecobank Côte d’Ivoire). We also have a very interesting investment in a company that provides services to telecom tower companies across Africa, spread through both east and west Africa. Our portfolio is quite extensive and we are quite excited because we are looking to start exiting some of our earlier investments, especially in the insurance sector, and we are raising a second successor fund since the fund is largely fully invested. The objective of Enko in the next two to three years is to pass the billion-dollar mark in terms of total asset management from our 500 million today. We are working hard and this will be achieved through a combination of a few successor funds and the private equity, with a bigger fund on the debt side because our debt fund has very good performance and attracts a lot of attention. Finally, we also want to manage local pool of capital. We are planning in the next few years to set up offices in selected countries in Africa. We have started with Côte d’Ivoire and we are looking at a number of other countries, such as Cameroon in central Africa. We will have a local asset management company managing a local pool of funds. The idea is to improve the diversification in terms of asset classes in country and then, as the regulation permits, be able to invest some of those funds that currently cannot be invested offshore outside of the home country.

What is your most current project?

The most current project is the IPO fund. It is an idea that is very dear to me. One thing that strikes me is that there are 25 stock exchanges in Africa. The market capital GDP ratio in Africa is about 20%, very far from where it should be. Even in South Africa where it is 100%, where there is a mature stock market, there is a huge potential to grow. There is room to have more African companies and companies in Africa listed on the stock exchange. We want to give more opportunities to companies to raise capital through the stock market which is a more efficient way to do so. That fund will act as an anchor so if an entrepreneur is considering listing his company, he can come to us and we will do the due diligence, analyze the company, and if we like it, we will commit to take on up to 30% of the total issue. We hope to play a catalytic role by attracting other potential investors to join in. It can be a very interesting concept and it can play a big role in getting more companies to list on the African stock exchanges. In the past year, there have been only about 20 new companies listed across 25 stock markets in Africa. That is really not enough. By having a more proactive approach to that, we can change things.

What are the issues that you face?

There are a number of issues. Education is a large problem. A lot of entrepreneurs do not know that the stock market is a viable route to raise capital. It also has to do with cost. It is perceived as expensive to raise capital on the stock market. There is also the issue of availability of capital in developed markets. When you want to list on the stock exchange, you go to an intermediary who does underwriting. He guarantees you that for a certain price, you will get your money. The problem that we have in Africa, especially in a smaller market in Africa, is that we do not have underwriters. The brokers do not have the balance sheet to be able to do that, so they work on best efforts. They try but they may or may not be able to raise the money. By having an institution that would be able to anchor up to 30% of the new issue and guarantee that up to 30% of the new issue is going to be subscribed, we think that we can play that role. The government also has to play their role in that they have to see the benefit of a more developed capital market. It allows better recycling of savings. If you do not have a well-functioning capital market, most of the savings is diverted towards real estate and government bonds or other forms of investment which are not necessarily the most productive. The government has to make it easy. We advocate for having a lower tax rate, for example, if you list on the stock market. Any company that is listed on the stock market brings more benefits to the community because they allow citizens to invest their savings in companies in the country. It is also a fantastic way to raise capital because there is a lot of capital that is available. It is much more efficient than private transactions which are not disclosed so you do not know the terms. It is very transparent. Clearly, all the different parties have to play their roles: the investors, the government, the regulators, and also the issuers themselves. By bringing all of those parties together, we can really help stimulate the equity issuance in Africa.

Developing countries are coming out of a crisis, managing to get their tax and fiscal policy correct. Which countries in Africa are in such a position at the moment?

Côte d’Ivoire is a good example. Certainly, if you look at the soft microeconomic numbers, they are doing quite well both in terms of the overall growth of the economy, the diversification of the economy, and even when you look at the ratios of government debt over GDP, they still have room to borrow. There are a couple of other economies in Africa that are doing well. Ethiopia is on the right track. There is also context that is more favorable in the sense that the economy in Côte d’Ivoire is mainly geared toward agriculture and they have a leadership position in some key crops that have a good positive trend going forward such as cocoa, palm oil, rubber, and cashew nuts. Increasingly, we can see that that provides for a more diversified economy base compared to other countries that are more reliant on a single mineral or oil. We are very positive about Côte d’Ivoire.

Do you have any upcoming projects?

Education is very dear to my heart and it will be a big opportunity for Africa in the coming years. In 2050 there will be 2 billion Africans. Most of the youth will be in Africa. The key to unlock that potential is really going to be education. In 2014, less than 5 years ago, we set up a private education company called Enko Education which provides students with a curriculum called the International Baccalaureate. We focus on an international curriculum because that gives the best opportunity for children to get into good universities. The challenge was to make an affordable, quality curriculum. We currently have 13 schools in 7 different countries in 10 different cities in Africa. The company is growing quite rapidly. We have over 2,500 students across our network. We are in the phase where we are going to be doing a capital raise to accelerate that growth with the objective by 2020 to pass the 10,000 students mark across our network. It is a very exciting project. We have already had good results. We have managed to send children to very good schools. We have sent some students to Yale, to Stanford, to Polytechnique in France. That will be a great way to take advantage of the demographic of Africa and the fact that Africa is going to have the largest population in the world before the turn of the century.

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