The Exchanges

Q And what does that imply based on the opportunity set you see about how big you're comfortable growing to in terms of raised capital?

A Based on today's average daily traded values, based on today's liquidity, we think the capacity of the strategy is about a billion dollars. But in terms of net subscriptions, we'd be comfortable taking about half of that. So today it would be around five hundred million dollars. And obviously this is a movable target based on markets, based on what's happening on the liquidity side. To contextualize that number, this is probably less than half of the AUM of some of our predecessor firms who are looking at Africa. And partially it's by design, because I think some of the firms became too big, and partially it's reflective of the current numbers. We don't want to get too big just to gather assets. So it's reflective of both the markets, but also the concentrated style that we're trying to run.

AI assessment note: “we'd be comfortable taking about half of that. So today it would be around five hundred million”

Q So you've kind of alluded to, Farouk, that the companies have delivered, but share prices maybe haven't been as strong. I'd love to hear just at an aggregate level, what are some of the basic financial metrics that might get people excited looking at Africa?

A In terms of earnings growth, as I mentioned, over the long period, it's been kind of high single digit to low double digit USD growth. And USD, we emphasize USD because that's what majority of our Clients and majority of people are looking at, obviously on a local currency basis, it's significantly higher. In terms of the portfolio, so our 10 stock portfolio, the current ROE is 33%. Into the dividend yield, we're talking about eight, nine percent dividend yield. And again, the yield, often follow-up question is, well, why are they paying out so much? The yield is high because the price is so low. The payout ratio isn't necessarily super high. And in terms of, again, valuations, the PE of the portfolio is today at eight, nine times PE. A lot of the names that we're looking at because of the valuations are market leading companies. So when you look at market shares, margins are leading because of the scale benefit. You know, in telecoms, if you're the largest company, most likely you have the strongest balance sheet, you have the benefits of scale, and your margin will more often than not be higher than some of your peers. So on financial metrics, it's in line, if not better, with a lot of the EM and even DM peers. But what's not followed through, as you've said, is, is the market cap. And I think this is not really Africa specific, maybe more symptomatic of EM as a whole.

AI assessment note: “the current ROE is 33%. Into the dividend yield, we're talking about eight, nine percent”

Q I'd love to dive in some more of your investment approach. So you've talked a little bit about the number of companies and the number you see in your universe. How do you get from one to the other?

A So as mentioned, the opportunity set is around 250. So this is just the basic filter, avoid commodities, avoid the small caps. And then from the two 50, we have something called the all Africa list, which is around 40 names. So quite a big filtering system there. And that essentially is a quality filter. Both Colin and I are very old school value bottom up fundamental guys. And we're looking a lot at qualitative factors. So things like the quality of the management, the track record of the company, What's the sustainable and importantly defendable moat of the business? And often this analysis is not just months, it's years of interactions with the management, years of traveling to the country. Post COVID, I think we've had six or seven in-country visits already. Through this accumulation of historic work, and also some of the legacy things that we benefit from our advisors, we'll narrow it down to the best 40 on a quality basis. And whenever we are looking to introduce A name into this 40, it will have to be approved by all of the team. And importantly, Ted, the 40 is a one in one out list. So it's constrained to 40 A because this is twice the number of the maximum number of positions we could have. So maximum number of positions is 20. Having two X that as the pool seems reasonable. And at any given time, let's say we have 40 names and there's an interesting new IPO, something…

AI assessment note: “from the two 50, we have something called the all Africa list, which is around 40”

Q What's your sense of, of the assessment of the public market opportunity compared to the private market opportunity in Africa?

A We have to be careful what we say because Miles Morland owns our private equity African firm. Um, but for us, again, I mean, it's a very simple equation because we think the opportunity in the public markets is fantastic. Why? Because you get all of the reasons why you're entering Africa, the demographics, the urbanization, and so on, but a much, much More attractive valuation. So the valuations PE, you're paying eight times. On the private side, you're paying price to sales eight times for the similar exposure. So you're, you know, the exposure is, let's say something FinTech or something regarding education. So we own an education company. So why would I pay a many times higher multiple on the private side when I can get it on the public? And with the public investment, I have 1015 years of track record, 1015 years of audited IFRS Financials audited by PwC. I have, you know, all of the transparency, which I don't get in the private sector. So for sure, over the last three years, flavor of the month was VC, flavor of the month was PE, and even within the African context, the PE guys did better, raised more funds, because that's what's hot. And before us, it didn't make any sense. You're getting the same exposure, but you're happy to pay more. And I think it's a side tangent, maybe. That it seems to me people are more willing to lock up their money. They don't want the day-to-d…

AI assessment note: “we think the opportunity in the public markets is fantastic. Why? Because you get... More attractive valuation”

Q What do you see in the composition of the shareholder base alongside of you generally in the names in your portfolio?

A I think it's hard to generalize. Um, South Africa obviously is much more developed market than Ghana or Egypt. So South Africa would be a more typical US or UK style shareholder list. So often the pension funds are the largest, the big asset management firms are also in the top three, top five, top seven. It's a very institutional heavy shareholder list. Whereas when you start going to perhaps Egypt and Kenya or even Morocco, a lot of the large holders are the founding families. Because earlier on in the development of those markets, and again, both have their pros and cons. Generally, we do like companies where the management team are part of the founding family, and they still own 20, 30, 40% because of the alignment of incentives and interests. So it does differ, and I think the South Africa and non-South Africa comparison is, is the kind of easy one in terms of institutionals and non-institutional mix.

AI assessment note: “South Africa would be a more typical US or UK style shareholder list.”

Q Which two people have had the biggest impact on your professional life?

A One is Peter Lynch. One Up on Wall Street was probably the first proper investment book I read when I was, I think, a teenager and really opened up the door or this universe of investing to me. And then subsequent to that, obviously Howard Marks, Buffett, et cetera, but Peter Lynch and one up on Wall Street was a big one. And the second one I would say is again, maybe cliched is my wife, because I have four young kids at home. I have a very chaotic house, but without her, I would not have been able to invest as much in my career, invest as much in all Africa partners, do all these trips. We spend a lot of time on the road. So any of my limited development I've had in my professional world would not have been possible without my wife.

AI assessment note: “One is Peter Lynch... And the second one I would say is... my wife”

Q In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. How is the rising inflation in the U.S. and, and much of the rest of the development world followed through in Africa?

A There's a lag. Some of our countries have inflation levels lower than the U.S. and the U.K., which I can't remember the last time that was the case. So there's definitely a lag, and why? Because some countries import less or more self-sufficient, other countries are less self-sufficient. But this is a pressure point for our countries, and this is a reason why some of the currencies, to Colin's point, have been under pressure year to date. Um, so in some of our markets, we are being quite punitive in terms of the depreciations that we're forecasting, because there's a balance of payments issue, because it's a bit of a gray market, which has been built up in terms of the official FX rate versus the unofficial FX rate. So it's something that we are tracking, but again, to our earlier point that not by design, perhaps, but the majority of the companies that we own today are distant market leaders within their sectors. So in this period, what we really care about is Pricing power, for example. Do the companies that we own have pricing power? So even if it's an inflationary environment, because of the strength of their brand, because of pricing power, they will lead the way, increase prices, and the impact on volumes will be much smaller than peers. Or, because they are market leaders, it's a survival of the fittest. The number two, number three, number four player may well fold beca…

AI assessment note: “There's a lag. Some of our countries have inflation levels lower than the U.S.”

Q How do you go about making the decision of what gets added to the all Africa list?

A It's qualitative and quality driven, so there might be a candidate which has been recently IPO'd or a company that we think has kind of turned around, and essentially there'll be a lead analyst on any name. It'd be for that lead analyst to compile his potential All-Africa list document and try and convince other guys, A, on its own right, it's a high quality name, and then B, it deserves a space. So at one point it will become a kind of head-to-head Battle between the prospective promoted name and which one is the candidate to be demoted. The names that are in the 40 already in the list are of a higher quality, of a higher caliber, and therefore that company has to wait. And the turnover in terms of the All Africa list is relatively limited, so in any given year, maybe three, four, five names may come in and out, but primarily it's because of delistings and listings. Why? Because, you know, Quality is something that we track over many years, and quality is something which is usually, not always, but usually difficult to destroy over six months. And if a company has been high quality for a while, it's in the list, it would be very difficult for, for us then overnight to think, look, it's not a high quality company anymore, it needs to be booted out.

AI assessment note: “lead analyst to compile his potential All-Africa list document and try and convince other guys”

Q What's happened with the sophistication of the companies in these markets and the opportunity you see at a company by company level from the bottom up?

A I would say, if anything, despite the markets up and down, and despite all of the things that we've said between the last five years, things being tough, the companies have kept delivering. So this is what we have to give credit where it's due, that the companies, and in many cases, you know, a lot of the management will say, look, we don't really care about the share price. We're just focused on bottom line, operational delivery, and so on. And this is what gives us so much positive vibes about what we're doing, that even over the COVID period and over the last five, six, seven years, They've just kept delivering. So the widening jaws in terms of where market cap has been flat to sideways or down and net profitability has kept growing. So sophistication in terms of tech adoption, in terms of tech leapfrogging in many cases. So a lot of the telecom companies that we cover used to be behind telecom firms in the rest of EM or even developed markets and have leapfrogged ahead because of COVID because of other lack of legacy systems to replace. And are probably way ahead in terms of, let's say, mobile money or mobile banking. So on the company side, I think we're very, very happy and comfortable that they are delivering what they're supposed to do.

AI assessment note: “sophistication in terms of tech adoption, in terms of tech leapfrogging in many cases.”