With plenty of money and time, family offices eye risky markets

By Carolyn Cohn

LONDON (Reuters) - With deep pockets and long time horizons, and perhaps even a desire to do good, some of the world's wealthiest families are investing in risky African and other frontier markets.

Family offices, which manage assets on behalf of wealthy families in more developed markets, are generally tight-lipped and seen as conservative in their approach to investing.

But their "patient capital", or money they are prepared to invest for the long term, can be well-suited to frontier markets - the less-developed emerging markets.

Profits are usually not immediate and it is not easy to get in and out of trades quickly in such markets, but the rewards can be large. Double-digit annual returns are not unusual.

"Family offices have dedicated capital and can take the time that's required - probably 5-10 years. When you have other people's money, it's more difficult," said Johan Kahm, founder of frontier fund FMG.

"If you are longer term, frontier markets are the place to be. Valuations are like those for the BRIC (Brazil, Russia, India, China) countries 10-20 years ago."

Single-family offices managed about $1.2 trillion globally as of September 2011, while multi-family funds, which manage assets for several families, had assets of $777 billion in December 2012, a study by Boston-based Cerulli Associates showed.

Family investors often focus on private equity, those in the market say, taking stakes in small and medium-sized enterprises, where returns can be appealing.

African private equity funds, for example, outperformed U.S. venture capital over the 10 years to September 2012, posting an 11.2 percent annualised return, a report by Cambridge Associates and the African Venture Capital Association showed.

"The fact that performance has been relatively good has brought Africa on the map," said Oliver Zucker, who runs a family investment office in London. "More family offices are talking about it and looking at it than 6-12 months ago."

The value of private equity deals completed in sub-Saharan Africa rose nearly 10 percent in 2012 to $1.16 billion, according to the Emerging Markets Private Equity Association (EMPEA), similar to the amount completed in Russia.

And in the first half of 2013, funds raised for investing in sub-Saharan African private equity deals jumped 45 percent to $860 million, EMPEA said.

Among investors looking to get into this market, around 20 percent are endowments, or family offices, according to an EMPEA survey, a higher proportion than in other regions.

French family private equity firm Wendel, for example, started investing in African telecom tower builder IHS in 2012, its first direct investment in Africa. Originally an industrial firm, Wendel raised its stake this year to $276 million.

Frontier markets have gained 14 percent in 2013. Markets like sub-Saharan Africa are less correlated to global markets than emerging market stocks are, analysts say, adding to their appeal.

FATHER AND SON

Many family businesses have made their wealth in small enterprises and can put that experience to good use by investing in small firms in frontier markets, according to Hendrik Jordaan, CEO of family-only private equity fund 1K1V.

1K1V says it already has substantial commitments from a number of families towards a $300 million fund to invest in Africa. Latin America and Asia may follow in future 1K1V funds, Jordaan said.

Families may give money to frontier markets in the form of charitable donations, but they also see investment as a viable alternative to aid - often prone to mismanagement.

Rock star activist Bob Geldof's 8 Miles African $200 million private equity fund made its first investment earlier this year, in a start-up company that plans to build commodity exchanges across Africa and improve food security.

As Africa shows greater political stability, it needs more than charity, said Charles Widger, founder of Brinker Capital and an investor in 1K1V, together with his son.

"Once you get stable government, philanthropy doesn't work," he said. "It does not build economies or create jobs."

Some families are also looking outside private equity.

Multi-family office Fleming Family & Partners invests in African private equity but has also seeded an Africa fixed income fund managed by Investec.

"We are attracted to investing in Africa as we are seeing high growth relative to other emerging markets, improving governance, and fiscal and monetary reforms," said Dan Axmer, fund manager at FF&P Asset Management.

But investing in African and other frontier markets also carries risks of poor governance and political instability.

Zucker said a passive investment in Africa should make up between 1 and 2 percent of a portfolio, while family offices looking for active involvement could invest up to 5 percent.

"Investing in Africa is not for the faint-hearted, nor for the investor focused on stable and predictable returns," Zucker wrote in a recent paper.

(Editing by Stephen Nisbet)