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Frontier markets: Risky business?

Svetlana Fathers, Editor-In-Chief of SuperReturn Africa spoke to Hendrik Jordaan, President and CEO of One Thousand & One Voices.

1. With plenty of money and time, family offices eye what are considered to be “risky” frontier markets. In your opinion, what is driving them to invest in those markets?

First, it is important to note that we are not a family office. We are a private family capital fund backed exclusively by industry-leading family offices. The limited partners in our fund--our underlying investors—are globally influential family offices rather than institutions such as pension funds or insurance companies. Second, family offices have multiple competitive advantages that are particularly well suited for frontier markets. For example, they have the ability to be more patient with their capital than many institutional investors, thereby seizing investment opportunities that, in more volatile frontier markets, might be missed by other investors. Third, many family offices have long and successful experience in investing in frontier markets, thereby giving them a more mature view of frontier markets than institutions who are yet to invest in these markets.

2. Family investors tend to often focus on private equity, taking stakes in small and medium-sized enterprises, where returns can be appealing. How would you compare the value of private equity deals in frontier markets and the returns they offer to the more developed markets?

We believe opportunities exist to invest in frontier markets without idiosyncratic “frontier market risk” or where such risk is lower than the perception of such risk. This, coupled with often less competitive frontier market environments and opportunities to add greater value to portfolio companies than in developed markets, make certain frontier markets attractive relative to more developed markets.

3. What market would you identify as the most lucrative frontier markets within Africa to invest in and why?

I don’t think anyone can definitively say that there is any one market in Africa that is more lucrative than others. You could pick virtually any country on the continent and find cases where some investments have done extremely well and others have performed poorly. The trick is to identify the best opportunities that fit within the broad mandate of your fund and offer you inherent, structural buffers against the unique idiosyncratic risks that are peculiar to the particular region.

4. What are the risks of family offices investing in frontier markets and how can they be effectively dealt with?

As mentioned earlier, all markets have risks. Where frontier or emerging markets usually differ is that their risks are often more difficult to accurately identify and more importantly, quantify. For investors not used to operating in frontier or developing markets, this is probably one of the greatest risks. The abundant opportunities available in frontier markets as well as the very clear challenges to doing business in such markets can often cause investors to both over-estimate and under-estimate their inherent risks. Over-estimating the risks in a particular country, region or business could mean you miss out on an excellent investment opportunity while under-estimating the risks can translate into losing money for your investors. The challenge is to get to try to achieve the goldilocks effect where your ability to quantify an opportunity’s risks relative to its rewards is `just right’.

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