Insight - Africa makes the grade for richest U.S. university investors

JOHANNESBURG Sun Jul 7, 2013 11:09am EDT

An undocumented UCLA student attends a graduation ceremony for UCLA ''Dreamers'' or Dream Act students at a church near the campus in Los Angeles, California June 15, 2012. REUTERS/Jonathan Alcorn

An undocumented UCLA student attends a graduation ceremony for UCLA ''Dreamers'' or Dream Act students at a church near the campus in Los Angeles, California June 15, 2012.

Credit: Reuters/Jonathan Alcorn

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JOHANNESBURG (Reuters) - America's wealthiest universities are venturing into Africa's fast-growing frontier markets in search of outsized investment returns that will allow them to offer scholarships, lure star professors and fund research.

For Sub-Saharan Africa, recognition from these deep-pocketed U.S. institutions, who have often earned envy among fellow global investors for their strong returns, marks a significant shift.

American university endowments - permanent funds of educational institutions - pride themselves on spotting new investment opportunities early, such as venture capital, private equity and natural resources such as timber. Combined, they manage assets of over $400 billion.

A study of 831 endowments by the Commonfund Institute and the National Association of College and University Business Officers published this year showed their annual net returns in the 10 years to June 30, 2012, averaged 6.2 percent.

In the same 10-year period, returns for the U.S. S&P 500 stock index were 5.3 percent.

In Africa, they are seeing many of the trends that played out in emerging markets like China, India or Brazil - strong economic growth, an emerging middle class, greater political stability and improved government balance sheets.

These are just the attractions that U.S. President Barack Obama highlighted on his recent trip to the continent when he urged American and other investors to "c'mon down" to Africa.

"The growth, consumer spending, improved governance and disposable wealth, they're all positive stories," said William McLean, who manages Northwestern University's $7 billion endowment.

His team is investing in Nigeria and Kenya among other countries and recently doubled its exposure to Africa.

"Our motivations are making some money," he told Reuters in a telephone interview. "You have to look everywhere for growth."

It is difficult to know exactly how many U.S. university endowments have put money in Africa because most prefer not to discuss their investment strategy.

Wale Adeosun, founding partner at New York-based investment firm Kuramo Capital Management, said endowments' interest in Africa began after the 2008-2009 financial crisis. He estimates that 10 to 15 percent of these institutions are already investing in Africa. Up to 30 percent may be seriously looking for deals there, he says.

"The larger pools of capital are here in the U.S. and you're seeing the interest picking up about exploring opportunities in Africa," Adeosun added.

Many endowments are required or aim to channel about 5 percent of their market value to their school's budget each year, to fund scholarships, research and new campus facilities.

The interest means that Africa is attracting a new class of investor - those with unlimited time horizons, in contrast to the speculative hot money that poured into the region before 2008 only to vanish when the global financial crisis hit.

"It's a lot more patient capital and ... the healthy thing about that interest is that it's likely to withstand the short term noise around the tapering of QE (U.S. quantitative easing)," said Razia Khan, head of Africa research at Standard Chartered.

Besides offering the possibility of cheaper assets and higher returns that have been hard to come by since the global financial crisis, Africa along with other frontier markets also provides more diversification for the investors.

"NOT SUCH A SCARY PLACE"

U.S. endowments' awakening appetite for Africa is another sign that the continent is shedding its past reputation for conflict, poverty and aid-dependency in favor of a more positive image of progress.

Lindel Eakman, managing director of private markets at the University of Texas Management Company (UTIMCO), told a private equity conference in Cape Town earlier this year that Africa's reality is different to what is often reflected by media coverage.

"Contrary to the public television out there, it wasn't such a big, dark, scary place ... We are glad to be here," he said.

Eakman added that UTIMCO, which oversees investments for the University of Texas and Texas A&M Systems, with assets of around $25 billion, had made two commitments to Africa through the private equity firms Helios and Actis.

Besides Northwestern and the University of Texas, which rank among the ten biggest U.S. endowments, other large schools investing in Africa include the University of Michigan, the University of Notre Dame and the University of Wisconsin. Between them these institutions manage around $50 billion.

Rockefeller University, a biomedical research institute in New York with around $1.7 billion in assets, expects to make an allocation to Africa this calendar year and has identified outside managers, chief investment officer Amy Falls said.

For Indiana-based Notre Dame, Africa accounts for about 2 percent of the $8 billion endowment. This exposure could increase to 4 or 5 percent in the next five years, said chief investment officer Scott Malpass.

"We've done a lot in China, Brazil, India. As Africa continued to evolve it was just a natural area for us to spend time there," he said, adding that rising incomes and the improving quality of businesses in Africa were big draws.

Harvard University, whose $31 billion endowment is the biggest in the United States, has been exploring the investment landscape in Africa, according to a banking source who said his bank was approached by the university a few months ago.

"There has been some interest," he said. "They were looking to debt instruments and private equity." According to Harvard's tax filings for the year ending June 30, 2012, the university had investments of about $198 million in sub-Saharan Africa, but this represented just 0.5 percent of its total investments.

CHASING 8 PCT RETURN

Those who have taken the plunge into Africa are treading cautiously, concerned about political risk, corruption and the relative immaturity of markets in the region.

"This is a long term process. We're looking out 15, 20 years so we're starting slow and proceed with caution," said Tom Olson, who oversees the University of Wisconsin Foundation's $2.1 billion endowment, which has commitments with Actis.

Investors are also gaining comfort from the "slowly increasing" number of good quality managers handling deals in Africa, said a senior private equity executive who said at least five endowments had made commitments to his firm's latest fund.

"They expect who they give money to be of the same quality as the teams they give money to in the U.S. and Asia," he said, asking not to be named.

The small size and illiquidity of the region's capital markets are another worry, especially for the richest universities whose assets can dwarf the GDP of smaller African countries.

"If everybody goes in and starts trying to buy things it's going to move the prices and grab the value away so you can't go in and take a big position," said Bill Jarvis, managing director of the Commonfund Institute, the research arm of Commonfund, which manages over $24 billion for more than 1,500 institutions.

Kuramo Capital's Adeosun said universities recognize the need to consider frontier markets like Africa if they want to meet their return objectives.

"You have to make 5 percent plus inflation plus expenses," said Adeosun. "They're all chasing an 8 percent type return."

(Additional reporting by Wendell Roelf in Cape Town; Editing by Pascal Fletcher, Ron Askew)

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