Growth opportunities and diversification usually and justifiably dominate asset allocations in private banking. Also, the trend towards philanthropic investments, i.e. to invest in ‘good’ and sustainable causes, is getting stronger and stronger amongst private banking clients. Finding a good balance between growth, diversification and the philanthropic aspects of an investment thus is key when giving advice to private banking clients: Private Banking Innovation identified one possible opportunity that offers an interesting balance – African Development Corporation (ADC), which focuses on investment opportunities in financial services in Sub-Saharan Africa.

Sonja Rossteuscher, ADC’s Chief Operating Officer, provides very interesting insights into the way ADC addresses a number of key topics in their investments. Amongst those, the way ADC addresses political risk in their investments seems particularly interesting, since it provides not only a World Bank approval of the quality of ADC’s investments, but also ADC and it’s investors are provided with a capital guarantee in case of losses through political risks. Looking on the other hand at growth and the return of ADC’s projects, it is worthwhile considering the business risk associated with the projects.

Without going into much detail here (for more details see the interview transcript below or visit ADC’s website), take the time to learn more about investing in Africa, and in particular how your private banking clients could participate in such an investment, in the following video interview.

Michael Stoeckli / Bernet & Partner

Interview Transcript:

Q: Could you provide us with the key facts of ADC – what type of company are we talking about?

A: It is ADC’s vision is to become a leading player in the financial services sector in sub-Saharan Africa by forming a banking holding across various emerging and frontier markets in the region. The company is set up as a German partnership limited by shares; a corporate structure which combines attributes of a partnership and a regular corporation based on shares. It is managed by a general partner, but can nevertheless become publicly listed as its investors hold regular share capital.

In terms of tax, ADC has set up a tax optimized operating structure out of Mauritius where a large network of double taxation agreements is available – both with Germany as well as with the majority of countries in southern and eastern Africa. It is therefore our Mauritian entities which hold our investments on the ground in Africa. At present, we have core investments in Rwanda, Equatorial Guinea, and Zimbabwe in the financial services sector.

Q: Why do you focus on financial services in Sub-Saharan-Africa?

A: ADC defines the financial services sector in a broad sense. This includes investments in commercial and credit banks, insurance companies, and related service providers. This includes companies in the IT and telecommunication services space, such as payment solution providers. Based on our analysis, the financial services sector is one of the strongest growing sectors in SSA and one of the most underdeveloped emerging banking markets in the world.

The banking market in SSA is still heavily underpenetrated with only 1 in 5 households currently having access to formal banking services. The size of the bankable population is estimated between 40 to 60 million. The potential for banking services is enormous, as bank loans or customer deposits as a percentage of GDP compared to other emerging markets are very low – 20% on average across the region vs. over 100% in mature banking markets such as Germany.

Also, interest spreads in sub-Saharan Africa are very high and therefore banks earn higher margins than in industrialized countries. For example, statistics published by the World Bank in 2009 show that the average return on equity of banks is twice as high in SSA as in Germany (18% vs. 9%); and 30% higher than in other emerging markets.

Finally, in our view, financial services are at the heart of every economy and their development is a prerequisite for overall growth and development of emerging economies. Industry depends on financial products and services such as deposit taking, loan granting, insurance coverage, and access to capital markets in order to grow and develop their business. As such, we very much see our investments in the financial services space as an enabler to the further growth of the local economies where we are active.

Q: As I understand ‘Development’ is part of ADC’s name for two reasons. On one hand, you certainly develop projects and investments, for the financial benefit of your investors. On the other hand, you also have a development role through some of your partners and cooperations.

A: Absolutely. We strongly believe that successful investing in sub-Saharan Africa requires both the provision of needed capital for funding investment growth, as well as the provision of know-how and skills in the form of direct management support in the entities in which we invest. This includes implementing corporate governance systems and best-practice procedures into our investee companies using know-how from our network of consultants and industry experts in the banking field. One of the reasons ADC is active on the ground in smaller frontier markets such as Rwanda and Equatorial Guinea, is that the managerial impact ADC can have is bigger than in more developed markets in the region such as Nigeria and South Africa.

Furthermore, since ADC’s first investments in mid-2008, we have been working together closely with MIGA, the Multilateral Investment Guarantee Agency, the insurance arm of the World Bank group. In February 2009 we signed a first of its kind master agreement with MIGA, fixing rates, terms and conditions for providing insurance coverage to ADC’s future investment portfolio within 14 pre-defined markets in the region. Every investment which is covered by MIGA must pass the world bank’s stringent social and environmental due diligence, guaranteeing ADC – and thus also our investors – that our activities on the ground are free of corruption, and aligned with international corporate social responsibility best practices.

Q: As you told me, investments in your products are predominantly done by family offices and by some asset managers. Can you judge why they choose your firm and your projects – is it for the return your aiming to achieve, is it out of ‚ethical investment’ considerations or maybe just for simple diversification?

A: We are a profit driven organization, and as such, achieving above-average returns is our primary focus and also the basic expectation of our investors. Also, as you correctly mention, portfolio diversification also plays a role as there are not many opportunities in German-speaking Europe providing access to sub-Saharan Africa.
Furthermore, given ADC’s structure as a partnership limited by shares rather than a typical closed-end investment fund – we are an evergreen vehicle qualifying for listing on a stock exchange. We as management are currently targeting an IPO of the company within the next two years, offering liquidity to potential investors in an otherwise illiquid investment opportunity. This listing opportunity is also a significant benefit to a number of our existing and potential investors.

Finally, given our cooperation with the World Bank, as well as our focus on job and skills creation in our investments in local SMEs, we have also attracted investors and asset managers who have a mandate to invest in funds with a corporate social responsibility focus.

Q: Do Private Client advisors require any special knowledge or skills to advise on investment opportunities at ADC?

A: Relationship Managers do not require special know-how to advise on this type of investment. If a client is interested in exposure to sub-Saharan Africa and specifically in the financial services sector, our team is available to assist in providing necessary information on the region, the asset class and the specific investment opportunity with our company. Furthermore, on an ongoing basis, we provide detailed capital-markets oriented quarterly reporting and are audited annually by one of the big five audit firms, so that every investor has knowledge and comfort around our investment strategy, implementation and results presentation.

Q: How strong is your foothold in private banking already, and how strong do you plan it to be in the future?

A: Over the past two years, ADC has made significant progress in building up its network in Africa, including access to experts as well as local deal flow. At the present time, given the significant opportunities in our pipeline, we are executing a capital increase that will run until the second quarter of the year. In the context of this capital increase, we have received significant interest from the private banking segment – particularly here in Switzerland as well as in London. We expect that private banking clients will account for a significant share of our new shareholders acquired during this capital increase and expect this trend to continue as ADC grows further.

Popularity: 23% [?]