When Larry Seruma was growing up in Uganda, the path to prosperity meant leaving the country, getting a foreign education, and making money overseas. Now, Seruma, 45 and living in Princeton, has come to believe the real money is in Africa.
Seruma is the principal and chief investment officer of Nile Capital Management, an asset management company based in Forrestal Village, that is devoted to investing in Africa and other global frontier markets. It manages three funds, one of which, the $45 million Nile Pan African Fund, is the only actively managed mutual fund in the country that invests exclusively on the African continent. An investor can buy into this fund for as little as $1,000.
In Seruma’s view, the nations of Africa offer better opportunities for growth than the economies of the United States and Europe, and even places like China and Brazil. His other two funds also specialize in frontier markets. “Frontier markets” are a subset of what analysts call “emerging markets.” Frontier countries are less developed, less capitalized, and have less liquidity than other places.
“People in Africa are buying their first car, or their first cell phone,” Seruma says. “People in developed markets are buying their fifth iPhone, which probably works the same as the last four iPhones they’ve had. The growth in Africa is real, and that means much more potential to add value than in developed markets.”
That Africa is less developed than some other parts of the world isn’t anything new. However, Seruma sees signs that the economic potential of the continent is finally being realized. He first noticed it during one of his many trips to his hometown of Kampala, the capital of Uganda. The 18-mile trip from Kampala to the closest airport, Entebbe, used to take about 30 minutes. But a few years ago, Seruma was delayed an hour and a half by a traffic jam. The trip regularly takes about two hours now, he says, due to the ever-growing number of Ugandans with cars — an inconvenience that is also an unmistakable sign of growing prosperity.
This was a clue that Africa might be a good place to invest, but Seruma lives by data, not anecdotes.
Seruma grew up in a large middle-class family. His parents were civil servants, first for the British, then for Uganda’s shaky post-colonial government following its independence in 1962. The bloody reign of dictator Idi Amin, from 1971 to 1979, took place while Seruma was growing up. He graduated from Makerere University and went to graduate school in England. Following graduation, he worked for a British asset management company.
In 1994 he traveled to Chicago, where he earned an MBA in analytic finance and statistics from the University of Chicago, and also met his future wife, Elizabeth, a consultant by profession who is now a homemaker. They have two sons, who go to Princeton Academy of Sacred Heart.
It was Seruma’s eye for statistics that told him there might be some hard data to back up his observations about Africa’s growing prosperity. During most of his 20-year finance career, Seruma was involved with investing in global companies that had operations all over the world. Digging into the numbers, however, he noticed the African divisions of many of these companies were the most profitable.
“The African businesses were more profitable, grew more strongly, and were well managed,” he says. One example was Diageo, a multinational beverage company. “If you look at their financial reports, you can see some of the African businesses are its most profitable ones,” he says.
These observations and others led Seruma to strike out on his own. He founded Nile Capital in 2004. Along the way, he hired Andy Chen as principal of trading and research and Kurt Kammerer as relationship manager. Chen, a Cornell alumnus with a University of Chicago MBA, previously worked as project manager at Hewlett-Packard and as a systems manager at Procter & Gamble. Prior to joining Nile Capital, Kammerer was a financial advisor with Merrill Lynch Wealth Management. A Harvard graduate, Kammerer has more than 25 years of experience in financial services and capital markets.
“The world is changing,” Seruma says. “One of the ways it has changed dramatically since the 2008 financial meltdown is that there’s a consensus that developed markets are going to give a lower return going forward. The governments have high budget deficits with low growth, and they have lower investment opportunities. In Africa it’s the opposite: high growth and huge potential.”
As for China and Brazil, he says, “those stories are over.” Those governments are looking to realign their economies for domestic consumption rather than the fast-growing, export-oriented economies they have been up to this point, Seruma says. Africa, on the other hand, with its fast growth and burgeoning middle class, is what he calls “the last frontier.”
Seruma has many reasons for being bullish on the zone from the “Cape to Cairo,” where he sees companies making big profits from increasingly wealthy Africans. One is the growth rate of the countries involved. The average GDP growth of African frontier economies is 7 percent a year, versus 2 to 3 percent for developed economies. Along with the economic growth comes enormous projected population growth, with the population expected to double to 2 billion by 2040. If current growth rates hold up, Nigeria will have as many people as the United States by 2050.
“This economy’s potential to distribute goods and services is enormous. Combine that with advances in technology, which have lowered the cost of implementing infrastructure, and it has a potential to grow at a much faster rate than the U.S.,” he says.
Nile is currently investing in three major areas. The first is consumer goods, which means things like beverages, basic goods, food distribution, and retailing. This category tends to grow along with population, and, as Seruma noted, population growth in Africa is big.
The next category is infrastructure. All those developing countries need highways, building projects, electricity, and other services that already exist elsewhere. Africa is home to 52 cities with a population of 1 million or more, which is on par with the United States or Western Europe. Nile is investing in companies that provide plumbing, electricity generation, and other infrastructure needs to these rapidly urbanizing places.
Seruma also invests heavily in mobile phone companies. Mobile phone services are already very popular in Africa. Mobile phones have penetrated about 75 percent of the market, and that number is expected to climb to 85 percent in two years. In Kenya, which is home to a sophisticated mobile banking system called M-Pesa, almost 50 percent of Kenya’s financial transactions are made over mobile phones. There is still more room to grow in this market, since smartphones now account for about 3 percent of all phones on the continent. Nile has put money into MTN group, the continent’s largest mobile network operator, which is based in South Africa but does most of its business in Nigeria.
In addition, the mobile market in Africa is very different from the United States. A smartphone in Africa costs about $50. Customers are likely to buy minutes in advance, with cash, rather than pay by credit card like Americans do.
The third arena of investment is in natural resources and agriculture. Here again, Seruma sees vast potential for growth as farmers modernize and countries build infrastructure to export more of their minerals. Many African countries have vast reserves of valuable metals like gold and platinum, with reserves there accounting for about 40 percent of the world’s strategic minerals. As for farming, Seruma says about 60 percent of the earth’s available arable land is located in Africa, so it is almost certainly destined to become a major breadbasket.
The fund invests in government bonds from Ghana, Ivory Coast, and Nigeria. It has also invested in banks like the First Bank of Nigeria, the Ghana Commercial Bank, and the Mauritius Commercial Bank. On the infrastructure side, Nile has invested in Dangote Cement, the continent’s largest manufacturer of cement, and Consolidated Infrastructure Group, which supplies heavy building materials and electrical infrastructure. It has bought shares of Nigerian flour mills, South African electronics manufacturers, Nigerian furniture makers, and chemicals, hotels, auto parts makers, and oil companies all over the continent.
“We believe Africa will be able to leapfrog in productivity in the next few years,” Seruma says. “The World Bank estimates Africa will have to spend $90 billion, or 15 percent of GDP, on infrastructure for the next 20 years.”
Seruma says he avoids investing in unstable countries. Ironically, he stays away from the country that thrives on the Nile River. “I’ve avoided investing in Egypt,” he says. “There is political uncertainty with regard to the country. We always watch so that at some point, there will be an opportunity to get back in. But right now they don’t have a functioning government. There is a political divide between the Muslim Brotherhood and everybody else, so it is a country we are avoiding.”
Seruma also stays away from companies that are valued very highly, mainly consumer-related name brands. “The prices have been bid up in the last three years, and they are trading at high valuation, so we avoid them,” he says.
Seruma is more knowledgeable than most about the territory. He spends six months out of every year traveling through the continent, meeting officials and business leaders and researching his next investments. Seruma speaks Swahili and Bantu in addition to English.
His latest trip lasted eight weeks and took him to Kenya, Uganda, South Africa, Namibia, Mozambique, and Tanzania, which covered eastern and southern Africa. The continent is so big and travel is so difficult, he typically visits one region per trip. His office is decorated with photos he takes during his travels — everything from lions in the savanna to his kids posing in Nelson Mandela’s former jail cell.
Traveling in the continent can be an adventure, though Seruma is used to it. “I grew up in Africa, so very little is surprising to me about how things work” he says. “I can see and appreciate the differences. I have seen the transformations firsthand, whereas someone who has not traveled in any of these places, when you’re experiencing it for the first time, you may not be able to see the transition from how things were.”
For example, he says, you could read about the troubles in South Africa’s economy, with its high unemployment rate, and write it off as a basket case. But Seruma, who has been traveling there since the 1980s in the days of apartheid, came away from his last trip there optimistic. “Compared to how the economy was 20 years ago and now, more and more people can afford things like cars,” he says.
Another telling sign of the times is that when Seruma was young, he would travel abroad and return home with things like sneakers. His new pair of sneakers would attract a lot of curiosity. But now, he says, everyone has at least seen them on the Internet even if they haven’t already bought them using their cell phones.
When he’s not actually in Uganda, he keeps in touch with his family over Skype.
“The connectivity is much better in Uganda than in Princeton,” he says. “It’s much clearer.”
Nile caters to institutional investors, professional money managers, high net worth individuals, and self-directed investors, all of whom are looking for high growth potential. Seruma says these savvy groups have few qualms about investing in African companies, despite an overall lack of American investment in the continent.
Seruma can only speculate as to why American investors have been slow to pour money into Africa. There are risks to investing in frontier markets, including war and instability. However, Seruma believes these risks are lower than commonly assumed, and that “There is a lack of knowledge about Africa.” He points to an increasing number of stable, democratic governments in Africa, and he says that peaceful transitions of power, rather than coups and revolutions, are becoming the norm.
If there is one thing Seruma has in abundance, it is information and knowledge. In addition to writing many articles on Africa and other emerging markets, he writes www.moneywatchafrica.com, a financial blog where he discusses news items like housing bidding wars in Namibia, the death of Nelson Mandela, and the announcement of a new Statoil natural gas plant in Tanzania.
In his more in-depth papers, also available on the site, Seruma writes about the effects of Egyptian political turmoil, China’s scramble for resources, and how to invest in Africa’s diverse economy. He has been interviewed by the New York Times, Moneynews.com, Bloomberg, and other media outlets.
The Nile Pan-African fund gained 40 percent in 2012, after a 20 percent drop in 2011. The most recent shareholder report stated that since its inception in 2010, the Nile Pan Africa Fund has returned 12 percent a year, outperforming the emerging market average, which earned 3 percent in same time period.
Seruma believes more people are bound to take notice of Africa’s growth and begin investing there.
“As the joke goes, most Americans learn about countries when America fights wars there,” he says. “But sophisticated investors really get the growth story. They really get the return potential. They get the view that this is a market that is neglected.”
Nile Capital Management LLC, 116 Village Boulevard, Suite 306, Princeton 08540; 646-367-2820; fax, 646-367-2815. Larry Seruma, founder. www.nilecapital.com.
#b#Beyond Headlines, Real Opportunity#/b#
Nile Capital’s blog at www.moneywatchafrica.com recently quoted an April 16 Wall Street Journal op ed by Ian Birrell, a former speechwriter for British Prime Minister David Cameron:
“The terrorist bombing that killed 71 people in Nigeria’s capital Monday morning [April 14] abruptly turned attention from what had been remarkable news … The gruesome bombing captured headlines, of course … But it would be a shame if the explosion overshadowed the pace of change in Nigeria, which reflects a broader economic transformation under way in much of Africa.
For too long, a self-serving alliance of Western aid groups, politicians, and journalists presented sub-Saharan Africa as a dangerously failed place in need of outside salvation. They offered only corrosive images of conflict, poverty, and disease, leaving tourists scared to visit and making fearful businesses slow to engage. The real story is rather different: It includes the stuttering spread of democracy, impressive economic growth, and a continent that now has more people who are overweight than go to bed hungry each night.
Nigeria, which accounts for one-quarter of Africa’s economy, underlines this complex new narrative. It is a remarkably entrepreneurial nation, perhaps one legacy of political failures and state inadequacies. The huge increase in GDP was largely driven by a thriving service sector and, increasingly, by manufacturing. Africa’s richest man, Aliko Dangote, is a Nigerian cement and food supplier. The oil and gas industries that traditionally propped up the economy contribute only 14 percent of GDP.
Goldman Sachs predicts that Nigeria’s economy will be bigger than Canada’s or Italy’s by 2050 — and not far behind Germany’s. And this is just one of 54 countries on a large continent that is home to six of the world’s 10 fastest-growing economies and the youngest population on the planet. The same rapid evolution is visible in Ethiopia, Ghana, Kenya, Mozambique, or Tanzania. Already Africa has a bigger middle class than India, driving the consumer spending that powers this economic swelling. Contrary to popular conception, the majority of Africa’s most rapidly expanding nations do not rely on natural resources . . . There is nothing illusory about the rapid growth and rampant change across the continent. Profound problems remain, as in other parts of the world — but much of Africa stands on the brink of takeoff comparable to China’s. Those who fail to see this are likely to regret their anachronistic attitude.
#b#Bullish on Africa#/b#
Larry Seruma, founder of Nile Capital at Princeton Forrestal Village, lists the following as some of his favorite companies:
MTN Group. Based in South Africa, MTN Group operates cell phone systems all over Africa and in several countries in Europe and Asia. The company posted revenues of $12 billion last year, and operated 34 million smart phones. The company recently reported a vast growth in smartphone and data usage.
MTN Group was founded in 1994. The mobile network also operates in Iran, Syria, and Sudan, which are being sanctioned by the U.S. and E.U. MTN Group stock has gone up 38 percent in the last year.
Dangote Cement. This Lagos-based cement company is the largest company traded on the Nigerian stock exchange, with revenues of $1.8 billion a year. It produced 10 million metric tons of cement in 2012, making it Nigeria’s largest cement manufacturer, with plans for rapid expansion.
The company has spent billions on new factories and expansion into new markets over the last year. This company is emblematic of Seruma’s belief that African infrastructure is a good bet. Dangote stock has risen 53 percent over the past year.
Kenya Commercial Bank. This bank, with its headquarters in Nairobi, is one of the country’s largest commercial banks, with assets of more than $2.6 billion. Though small by American standards, this is enough to make it a major player in the region.
Kenya Commercial Bank stock has gone up 13 percent over the last year.