To build an asset servicing business in Africa, providers must choose where to locate their offices. Supportive legislation could make the task easier. George Mitton reports.
Standard Bank opened up a custody business in Swaziland 15 years ago. In financial services terms, this small African country was undeveloped, but the rationale was that when the growth did come, Standard Bank would be present and ready to benefit. Yet today, the firm’s custody assets in the country are $70 million, a meagre sum in custody banking terms. The growth simply hasn’t happened.
On the other hand, there is Nigeria. In 2005, the firm’s custody assets in this country were less than $200 million. Since then they have increased a hundred times over. Rajesh Ramsundhar, head of investor services, Africa for Standard Bank, estimates his firm provides custody for up to 80% of foreign investment into the country.
“As one of the only recognised providers in the market we’ve benefited significantly,” he says. “That could only be achieved by holding out and waiting for these inflows.”
Developing new markets: it’s a waiting game. But how can providers know which markets will go the way of Nigeria and which will remain sleepy non-events, places in which the cost of on-the-ground staff outweighs the money they bring in? This, in a nutshell, is the problem of how to develop an asset servicing industry in Africa in a cost-effective way.
The question of custody in African markets is particularly topical at the moment because of the latest enthusiasm for frontier market investing. Ramsundhar says he deals with a new pan-African fund or a new client with pan-African investment objectives every one or two weeks. “That demand has grown significantly in the past few years,” he says.
As one of the oldest and best-known banks on the continent, alongside Standard Chartered, Standard Bank aims to support clients in as many African markets as possible. The firm
has custody capabilities in 15 African markets, South Africa included, with a further 13 covered by subsidiaries.
The firm is looking to expand, most obviously in countries where its wholesale bank parent is present but where it doesn’t yet have custody operations, such as Lesotho, the Democratic Republic of Congo and Angola. There are signs that the Angola stock exchange will be launched some time in the next 12 months which would be an obvious time to set up a custody operation in the country. It is an exciting time to be building a business, but it can also be a frustrating time. Although there is a benefit in being first on the ground in new markets, there are also significant costs involved with running an operation for years without substantial assets.
“There are times when you need to take a bet on markets,” says Ramsundhar. “You may get no flows, but you have to keep it open as part of the network. This is what clients require.”
Other service providers, for instance fund administrators, face similar concerns if they want to set up in new African markets. Maitland Group is a South Africa-based fund administrator. In recent years the firm has made efforts to expand beyond its home country. The business plan, says Andre le Roux, head of business development for Africa, is to follow the firm’s fund manager clients as they seek to create a pan-African footprint. So, if Old Mutual, for example, wants to extend its fund management operations to Kenya and Uganda, Maitland would aim to follow.
However, the continent is at the early stages for this growth spurt. At present, Maitland has a significant presence in only two countries outside of South Africa: Namibia and Botswana.
The firm has about $200 billion in assets under administration but only $30 billion comes from outside South Africa.
The issue, says Le Roux, is that with the exception of South Africa, there aren’t many fund managers based in the continent. Indeed, he jokes that the global fund management capital of Africa is London, because of the many Africa-focused asset managers based there. It does seem likely that the next wave of fund managers will be based in countries such as Ghana, Nigeria and Kenya, “but we don’t think they’re big enough to justify us putting offices there yet”.
Legislation could change things. Le Roux says that if more African countries put in place pension fund regulation that required government and quasi-government pension schemes to invest in-country, in infrastructure for instance, that would create a need for asset managers on the ground. “When we start seeing that sort of legislation, that suggests there will be in-country managers, as opposed to suits flying in from London,” he says. “That would get us to commit to putting down roots.”
This is clearly a long-term trend and one that will have to be watched.
However, despite his preference for a “wait-and-see” approach, Le Roux echoes Ramsundhar’s comments about the importance of being in markets early, especially if coming from a base in Johannesburg.
“One thing we have realised is that Africans in general aren’t that keen on South Africans coming in and throwing their weight around,” he says. “We have to be humble and show we are committed to the country. You may operate for three years before earning your first dollar.”
Many global asset servicing firms are taking a similarly cautious approach to Africa. Deutsche Bank, for instance, has a global markets presence in South Africa and an administration hub in Mauritius. The Mauritius hub services flows in and out of the continent and is the domicile for various special purpose vehicles and some fund structures.
At present, the firm does not plan to set up fund services elsewhere on the continent, says Harold Leenen, regional head of global transaction banking for the Middle East and Africa.
BULLISH
“Personally, I’m bullish on Africa but also realistic,” he says. “Fund services is a function of how well the country is doing, the middle class having cash invested. The fund services piece is something at the end of the development.”
Leenen says he sees potential in the immediate future for infrastructure finance, dealing with trade flows and corporate finance. Eventually, it is logical to think that a sizeable asset management industry, with fund services needs, will develop across the continent, but that may take some time.
However, Deutsche Bank says it can play the African game with its Mauritius hub. The island is an appealing base for this kind of work because it has double-taxation agreements with a number of African countries, and produces a large number of trained accountants each year. Indeed, it would probably prefer to serve African clients from hubs such as these, in accordance with the company’s global strategy.
“Deutsche Bank operates the hub and spoke model whereby administration is done from centres,” says Tony Hallside, vice president, direct securities services, Deutsche Bank.
“This results in a higher quality of service to our global client base,” he adds.
PENSION SCHEMES
Perhaps asset servicers will have to wait for reforms of Africa’s pension schemes before there are a large number of fund manager clients to serve on the ground. Until that happens, the likes of Standard Bank and Standard Chartered, which already have networks on the continent, will be at the forefront of developing new markets. They will hope to be in more countries that are profitable such as Nigeria and fewer markets where flows are meagre, such as Swaziland.
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