Collateral Damage?

By Zaki Abushal

Hedge fund ethics are once again in the spotlight after a report claimed they have been involved in unethical African land grabs. So are there shady dealings going on in the continent’s murkiest markets, or have the claims highlighted an acceptable cost of a greater good? 

Capital flows into Africa have always raised the thorny question of ethics. Where is the money going, what is it being used for and who is benefitting? The flow of aid into the continent and sub-Sahara were the traditional punch bags of activists and critics, allowing commerce to slip under the radar. More recently the focus has changed, foreign direct investment has surged and China has been among the principle investors. Unsurprisingly, any criticism has been brushed aside.

China isn’t alone; Western fund managers have long looked at the continent and quietly gone about positioning portfolios to get the best return for investors, fully aware of the high risks. These fund managers have been driven on by investors, many of which are tired of scratching around for scraps in the markets, and are, literally, looking to the horizon for deals that will provide alpha in a market glut full of beta.

There is even added fanfare, with high-profile private equity managers raising capital for funds in Africa. Both Carlyle and Helios have raised record-breaking amounts for private equity vehicles that will tap into African investment opportunities. This investor movement and the process of doing deals in Africa are bound to raiseethical questions and draw scrutiny.

Oakland Institute, an Oregon-based research organisation, recently released a series of reports, Special Investigation: Understanding Land Investment Deals in Africa, detailing the activities of a number of hedge funds in Africa. The countries covered by the research include Ethiopia, Mali, Mozambique, Sierra Leone, South Sudan, Tanzania and Zambia. Oakland claims that hedge funds have engaged in ‘land grabs’ across large parts of the continent and were failing to live up to socioeconomic obligations in the local communities. Emergent Asset Management was one fund targeted by the research.

The UK-based firm established EmVest Asset Management, a joint venture with South Africa-based Grainvest to launch the Africa Land Fund. One of the land acquisitions conducted by EmVest took place in Mozambique, northwest of the capital Maputo. Oakland questions statements made by Emergent Asset Management to its investors over the deal. According to reports, Emergent Asset Management claims to have acquired 2,000 hectares of land, but the legal documents (duat) show rights to only 1,000 hectares.

Furthermore, according to Oakland, terms of authorisation for the project require the employment of 18 full-time and 100 seasonal Mozambican workers during the first year. The project falls short of hitting this target according to the Oakland report, employing 17 permanent and 85 seasonal Mozambicans. Investors into Emergent and other funds that buy land in Africa include large universities such as Harvard, Vanderbilt, Spellman, and Iowa, according to reports.

The funds in all these cases have an obligation to the investor to maximise returns but the research and subsequent media interest highlights the difficulties of doing business in some of the poorest regions of the world.

Progressive leaders

Many alternative and traditional funds invest in Africa and are faced with this dilemma on a daily basis, with many doing their utmost to maintain ethical standards in a testing environment. “In Africa we’ve got investments with several different funds, and it is definitely impact and definitely financial,” says Gerhard Pries at Sarona Asset Management. “We’re looking for market or premium-rate financial returns, so we are not putting soft money in there, and we are also looking for strong social and environmental impacts. We do think those two can be complementary in emerging and developing markets. In fact if you drive the social and environmental concerns as a business leader you can outperform your peers.

“We are not looking for fund managers to buy shares and sit on their hands, we are looking for them to transform a company. What will you do to improve the social outcomes of the community, the employers and the suppliers? We are looking for progressive-minded business leaders,” he says.

However, Pries understands how certain investments can appear too good to miss. “It doesn’t surprise me that there is land grab pressure. There’s a financial opportunity and people will grab for it, I understand that, I think it is a good financial play broadly,” he says. “Agriculture is very interesting. There was one fund we looked at, a guy was doing housing, ostensibly, and he seemed more interested in buying up land and flipping it – getting into real estate development and selling it on quickly. We didn’t pursue that because he was too interested in land values and not his core business.”

Even with the best intention, some funds that invest in Africa cannot dedicate months to one deal, either due to their investment approach or simply restrictions on resources. “We spend around 75% of our time on country research and then much less at the company level, perhaps two to three days if we’re really pushed, but usually longer,” says Benjamin Griffith of Caravan Capital. “Hopefully, in most cases, we can speak with company management. But typically we’re here to make the best risk-adjusted returns for our clients.”

Often it’s up to the investor to impose restrictions on the fund manager. “Every investor has its own constraints and policy for what it’s looking for from an Africa manager. We can work with investors on that, so we can set up a managed account if they’re after something that is materially different from what we em-ploy at the fund level. But nobody really questions our reasoning about entering and exiting any investments,” says Jenni Chamberlain CIO of Finch Asset Management.

Although it should never be used as an excuse, it’s often forgotten how difficult it is operating in frontier and emerging economies compared to the developed world. “Lack of fundamental information, getting reports on time, quality of reports, discussing earnings with management in a timely manner can all be tricky, doable but tricky,” says Griffith.

“When we speak to politicians and bureaucrats in these markets we ask for two things, which we rarely get – stability of policy and reliability of contract law, transparency of judiciary,” says Pries. “Those are really hard to get. In many places you hear stories that it is a matter of throwing enough money at it, pay off the right people and you can get what you want.”

Unfortunately, this form of corruption is commonplace and fund managers as well as investors must be mindful of being caught out. It is exactly that kind of deal which will find you in the headlines for the wrong reasons.

Peace of mind Yet there is a further due diligence process that can offer investors and fund managers a little more peace of mind. The International Finance Corporation (IFC) and a multitude of multilaterals operate in Africa with the aim of improving the business environment and the economic growth prospects of the country. The role of these organisations is manifold and fund managers that operate in markets alongside the IFC are largely complimentary about its efforts. Newly formed Caravan Capital, a small frontier hedge fund, has had little direct interaction with the IFC due to Caravan’s size but has benefitted from its presence.

“IFC publishes reports on listed companies in the region, indepth studies as part of its own investment process. That gives us, as an investor, more research to work off,” says Griffith. Sarona Asset Management often works alongside the development agencies when investing in the region.

“When Sarona invests it will often co-invest with development agencies CDC, FMO and IFC. They generally have pretty high environmental and social governance hurdles for private equity funds to adhere to,” says Pries. “The private equity fund already has to get over these hurdles, which are set pretty high. I don’t think they require private equity firms to confirm that they’re creating a certain amount of jobs but the funds are required to report the number of jobs they’ve created, which will form some part of an evaluation.”

In the long term, the danger is, and always has been, that any investment in Africa is positive, no matter how it gets there and what it invests in. “We are huge advocates and supporters of DFIs who have invested in Africa, the attention they give to Africa the type of investment that they’re making and the way they invest,” says Finch’s Chamberlain. “We have nothing but good things to say about the African development banks. The bottom line is Africa is in need of capital, end of story, and I for one am an advocate of any foreign investor who sees the opportunity for what it is and the risks for what they are. The continent is fraught with different kinds of risks. We are huge supporters of the work the DFIs have done across the region.”

The IFC has its critics, and Oakland institute is one of them. In a recent report (Mis)Investment in Agriculture: The role of the International Finance Corporation in Global Land Grabs, Oakland highlights “the work of the IFC, the private sector branch of the World Bank Group, its provision of technical assistance and advisory services to developing country governments, and how these services increase the ability of foreign investors to acquire land in developing country markets… and how this can undermine the wellbeing of local communities.”

Fund managers are not development agencies. Funds are there to maximise returns for investors albeit in a socially responsible manner. There are numerous checks and balances that funds can, and do, adopt throughout an investment process to ensure that the investments made are secure. Perhaps it’s time to put the question of ethics a little higher on the due diligence list.