Insparo Africa is the latest Africa-focused hedge fund created as markets develop across the region and the political situation remains relatively stable. Domiciled in the Cayman Islands, the fund aims to deliver 15% return per annum.
We spoke to co-founder and chief investment officer Mohammed Hanif and started by asking him to explain the background of the company.
A: “Insparo Asset Management was set up with a focus on frontier and niche markets. The style of the investment management team is deep value and real stories looking at undiscovered areas of the world, as well as undiscovered companies within discovered areas of the world, but less so.
“The idea behind Insparo was to pick a team that has the experience in that type of investment style, and that is exactly what we do. We are investors as oppose to traders, and that is really what we are looking at – deep value niche markets.
“The team that you now see at Insparo was not established by accident. It was very much a targeted approach and a plan that was well hatched right from the beginning and the conversations we had to start with. My experience is that I spent ten years at Dresdner Bank trading proprietary emerging markets, distressed and special situations and that was a global mandate across all markets. It traded through the Russian crisis, the Asia crisis and then Argentina’s default in 2001, but at the same time was looking globally overall.
“Africa was new to me. I had worked on a number of special situations in the world and Africa, which is how I met Francis Beddington (co-founder and head of research). I moved to Bluebay Asset Management, the London emerging market group, where I was responsible for emerging market distressed debt and special situations and worked very closely with Francis on a couple of situations, most notably for example Iraq.
“Francis’ background is that he started as an economist with the government and he ended up heading up Africa, Middle East research at JP Morgan and then went on to establish that function at Standard Bank. He is probably the number one researcher/analyst who has actually dedicated his career to Africa and the Middle East.
“The work we did in Iraq was very much right on the ground. The documentation was so poor – the supporting documentation if they were going to be recognised in what would ultimately be a reconciliation exercise and then you had to work out that potential debt could be worth in the various scenarios. Number one you had to identify where it was and then go and find it and assess the quality of it. That is very specialist work, and you have got to get your hands dirty and do the hard yards. You really do need that kind of background to be able to say ‘yes, I would like to invest in these markets and I would like to know what I am doing.’
Q: What was the thinking behind setting up the specific type of fund?
A: “In March last year Venezuela was trading 164 over. That seems like a long time ago now given the price but March last year in the financial markets was not that long ago. I was not going to sit there at that time and tell my investors that in the mainstream markets I see value. I did not and neither did all of us who set this fund up. We were looking for real growth stories based on sustainable drivers. And that really is what MENA is about to us, and that is why we focussed on it.
“The actual vehicle of investment may have a hedge fund strategy approach but we are almost like a long only asset manager because these markets are so new. They are frontier – you do not have complex derivatives and complex strategies. It really is about real stories. The only way to go short is to not be in it.”
Q: What is your investment strategy?
A: “When setting up the fund we felt that we needed a new type of vehicle. The old business models are outdated. We said right from the beginning that we did not want a prime broker, and we did not want to use leverage. We think operational risk is heightened and we want to make sure we address that and take a very institutionalised view of the business itself before we even begin to talk about investment. It is a very important point and it is reflected by the sponsors that we do have, and the way the firm was set up which is very control conscious.
“We also looked at the fact that you have got to be multi-strategy. In the region there are some countries that have got a debt culture well established. Others have got very old equity markets with no debt culture and many others who do not even have an exchange. You may find these countries neighbouring each other. If you want to capture the alpha of the growth story you cannot limit yourself by asset class. You have got to be able to take equity risk, and fixed income risk and at the same time local markets as well.
“Now in the local markets Africa finds itself in a situation at a place in history where local market financial technology is basically matured. It took us ten years to get the Asians and Americans and Eastern Europeans to develop local bond markets after the Asia crisis, but we have reached the point where that has now matured. Local markets is the fastest growing asset class within emerging markets.
“The Africans find themselves with clean balance sheets after all the debt forgiveness and in a situation where fundamental drivers of growth actually lent themselves to grow within the local markets, or that asset class, to grow within the region.
“The other reason why we decided on the multi-strategy approach is we felt that we were coming to the end of a cycle and we wanted to be nimble. We wanted to be able to move the portfolio around as and when we can. Liquidity is an issue that everyone is having right now but liquidity is always limited in frontier markets. In a way the best way to manage your liquidity is to have a multi-strategy approach which gives you diversification within structurally by having different instruments. That was quite a new idea.
“We also excluded South Africa because we felt that was too highly correlated, effectively for us it is a developed financial market in an emerging market country.”
Offshore regulated funds investing in Africa ex-South Africa
Q: Are there any strategies you are avoiding?
A: “South Africa we are avoiding. We are avoiding crowded trades, structured derivatives and at the moment we are underweight equity and overweight fixed income and cash.”
Q: Are you targeting any particular sectors?
A: “Broadly not but clearly some sectors are cyclical or have a higher correlation to exogenous factors around the world. It is about sustainable growth which means looking at the growth of the middle class and the consumer and the sectors that fall out of that type of approach and analysis, such as micro-finance, other financial services, technology, telecom, infrastructure. And agriculture, which is a massive global theme that is going to play itself out in the most under ploughed region or area of the world, which is Africa.”
Q: Are there any countries you favour within the region?
A: “It is easier to answer that question by saying are there any countries that we don’t favour. We don’t necessarily like the Gulf countries. We think Dubai real estate, for example, is a massive structural risk to the whole Gulf complex, and you really need to understand it and be very close to everybody on the ground. Even then it is quite clearly a bubble. It’s just a question of time as to when - at least if it does not fall off a cliff and does not crash it will stop growing. That is not really where the future is. So we are avoiding places like that.
“The other two are Egypt and Nigeria because when I talk about crowded trades – that is where the low hanging fruit in this continent is. When people say I’ve got a bit of Africa and Middle East exposure in my global emerging market fund what they mean is South Africa, Egypt and Nigeria. And it is the t-bills, the easy to get into equities, with Nigeria, for example bank equity. We avoid that sort of thing – that to us is not value-added. That is the first thing that anyone would do. We are specialists in the area. We go down on the ground, and we meet the locals. Out of our top ten counterparties seven of them are based in the emerging market. It is about being on the ground, picking out that information and being involved with quality businesses and investing in them.”
Q: How has the fund performed since launch in June?
A: “We are a little bit down, -2.3% year-to-date, after what has been probably the most difficult investment climate in the world in a generation.
“I am a perfectionist and if I don’t achieve the targets in any market that we set out to achieve I would be disappointed. But if ever there was an exception then I would have to think about that in a much more longer term context. We will suffer some volatility, we have picked up some assets which are great and some great valuations. Can they go down? Yes they can – are they going to pay? Yes. And what kind of yields are we getting? They are very attractive and the most attractive they have been since inception of the particular assets I am talking about.
“We can withstand short term volatility. The fund is designed to have a long term view. Our seed capital is locked up for four years and third party investments outside the seed capital are in a two year lock up. So it is too early to judge the performance. When we talk to our investors we tell them it is a long term proposition. It is not something that is going to deliver returns over two or three months in terms of percentages but in the space of two years we would like to say you are looking at multiples. That is the way you should approach it – whether that is deliverable or not we will see, but that is what I think."
Q: What type of investors have you attracted?
A: "I would have expected high net worth individuals and family offices but we have also got endowments. And now we are seeing institutional investors coming in. These are sophisticated investors that understand emerging markets and understand the frontier space as well. That is the commonality between our investors, rather than say that they have got to be fund or funds or they are likely to be family offices. It is more about the asset allocation process. They are based in Europe and the US, and we are talking to people in Asia as well. And we will have people from within the region very soon – that is work in progress."
Q: What have been the key drivers of asset growth?
A: "Reverse enquiry. We haven’t actually gone and done any formal marketing for two reasons. One, we have always said we started off with a significant amount of seed capital, which we wanted to get invested and build a portfolio which we felt we would be happy with, given the risk profile. That is locked up for four years. The driver of asset growth has really been our profile, the reputation of the main investment team and our backers. We have very strong sponsorship and institutional backing reflected in the type of people that have backed us, I think that shows commitment and reflects on the fact that we have set up an infrastructure and a company that is basically a small one but with the backbone of a much larger institution. "
Mohammed Hanif, chief investment officer Insparo Capital
Q: What do you think will help to attract new investors?
A: "It is a difficult one to answer right now, because the world has just been shaken from the scruff of the neck and the dust has not settled down yet. However, through this period we have actually raised assets. It is one thing to be established as a major top end asset management company when we are talking multiples of billions and to have a marketing machine and a process which continues to go along. Then raising assets is a different ball game.
"For a new fund to have launched during this time and raise assets (and we have not marketed it has all been through reverse enquiry) indicates that it is not so much an achievement on our part, it is more to do with this space. It also shows that what we have done is for the right reasons. There is a demand for the fund because I do not think there is anything quite like it out there. So that is the simple answer. If you want to allocate to this space, you want to allocate to experts, people that know what they are doing and have the set-up and the contacts on the ground to be able to invest with knowledge and have the profile of money i.e. assets that are not going to penalise anyone in particular, hence the long lock-ups."
Q: What have you done differently from other similar funds?
A: "We are multi-strategy, ex-South Africa, including the Middle East – I don’t think there is anyone else doing that. There might be one or two but I don’t know of them. We don’t use leverage, we’ve no prime broker, our asset liability structure is very strong with the four-year lock on the seed, and the two-year lock on other funds. That allows us to go and look for our deep value investments. Strong balance – the robust platform that we have got and in the end we are actually quite simple and transparent."
Q: If you are successful, others might come along and copy your strategy?
A: "I am not concerned or worried about replication. It would be flattering but replicating it is going to be a function of experience and having the skills and the network and to my knowledge there are not many people that have that. So it is quite a challenge - the barriers to entry are really that.
Q: And not many of the other MENA funds are ex-South Africa?
A: That is correct.
Q: Do you have a particular investment philosophy?
A: "We keep it simple and we stick to the basic principles of what our mandate is, which is looking for growth, sustainable drivers, deep value, real stories."
Q: Do you have any expectations of future growth with regards to assets under management?
A: "We have seen an amazing amount of interest. We will begin to market formally probably into the next year. That will probably be the more sensible time to do it. I can see us in the early part getting into our soft close size of about $300m. I think the optimal size of this fund is about $500m, and that is when we will close it. At the moment the assets are more than $125m."
Q: Do you have any predictions for the market and the fund?
A: "My predictions for the fund are a bit predictable and boring. We are just going to continue doing what I have already described but what I think is interesting, more importantly is that if you look at the industry then I think there will be increased regulation. I think to an extent it will be an over-reaction like there always is and over time we will need to adjust and find the right balance. But what I don’t think we are going to have – and it is going to be very select – is the concept of leverage being handed out. The strong managers with the proven experience and skill plus expertise in what they do will continue to survive. It is a time when you have got to sort the men from the boys."
Q: There has been talk that half of all the hedge funds could end up closing. If that were to happen that would affect the pricing wouldn’t it?
A: "If you mean the 2 and 20 model you could argue that given that there won’t be a plethora of funds to choose from."
Q: Would there not also be an affect in terms of trading as well if there is a smaller pool in which everyone is operating?
A: "I think because there has been a destruction of capital it will be reflected in that. If the market becomes smaller than it is today, if we do get to that point were 50% of hedge funds have closed. But if you look at some of the balance sheet destruction that has taken place at the intermediary level i.e. the banks, it is just a natural process of selection that is occurring in each of those sectors of the financial services industry.
"I think that for those that will survive will mean there will be less competition for less assets. So does that really change the dynamic of the individual fund? It is probably too early to say. In the end the world will still need to invest. It is just a question of how and when. The transparency issue is going to be something that is definitely going to be challenged.
"You need a balance because in the end it is investors money and a lot of funds in the past have been very arrogant in the way that they have been a black box and very secretive. I think that in some way the hedge fund industry needs to open up a bit and there needs to be increased transparency.
"At the same time that does not mean you open up your positions to everybody because that in itself is a problem. What the right balance is I don’t know or how it is achieved so maybe the regulator needs to step in and operate a form of policing."