Investment Banking in Sub-Saharan Africa: The Promise of Emerging Markets Realized?
Have emerging markets lived up to the hype?
Back in 2005 or 2010, the answer seemed to be “Of course! They are growing quickly,” or “Well, they made it through the financial crisis in one piece.”
But what a difference a few years can make.
These days, the question is more like: “Can emerging markets get back on track?”
With slowing growth, recessions, and commodity-price crashes, they’ve taken a beating.
And among the BRICS, South Africa has had a front-row seat for all those trends.
Luckily, a reader who works at one of the large banks in South Africa stepped forward to volunteer at just the right time:
The Sub-Saharan Investment Banking Landscape: Desert, Savanna, or Jungle?
Q: So can you describe the investment banking market in Sub-Saharan Africa?
A: Sure. Almost all the activity in this market takes place via teams in South Africa, so I’ll start there.
There are four major South African banks: Standard Bank, FirstRand Bank, NedBank, and ABSA, which is majority owned by Barclays (though it may not be for long, given recent news…). Investec is a strong fifth, but it has a wealthier client base and focuses on both South Africa and the UK.
NedBank doesn’t have a real investment banking business, but Standard Bank and FirstRand, through its “RMB” unit, have solid IB divisions. ABSA has a presence in corporate and investment banking, but it’s smaller than Standard Bank and RMB. Investec has a decent sponsors business for the JSE, and it does compete locally.
RMB has an equities JV with Morgan Stanley and is fairly strong on the ECM side with both domestic and international offerings.
Many of the international banks are also here, but they have very different headcounts.
JP Morgan is the largest with ~13 staff (~150 including non-IB divisions), followed by Citi (~12), Goldman Sachs (~10), BoAML (~10), Deutsche Bank (~8), and Credit Suisse (~4). UBS is also here but is currently looking to build a team.
JPM generates the most revenue out of that group, but most of its employees work outside of investment banking.
So if you look at fees from M&A and capital markets deals, it’s more of an even split for these banks over the past ten years (except for CS and UBS, who lag behind).
There are some boutiques here as well, but they are mostly regional boutiques rather than the elite boutiques from the U.S. and Europe.
One exception is Rothschild (arguably an elite boutique in EMEA), which has advised on a few deals in South Africa.
Another boutique firm is Java Capital, which does practically, and exclusively, all real estate deals in South Africa and the rest of the continent, depending on the involvement of local REITs.
Q: Great. And what about recent market trends?
A: Yeah, things aren’t going so well here lately.
The commodity-price crash has reduced deal activity by double-digit percentages, and then the South African Rand (ZAR) has fallen against the USD by almost 40% in the past year.
And then our state-owned utility, Eskom, has been in serious financial straits, to the point where the government had to sell other assets to fund it. In the future, the government might even have to bail it out.
Our political leadership is fairly dysfunctional and prone to scandal and corruption, and our current President is not exactly the sharpest knife in the drawer. He fired the existing Finance Minister Nene, after which the markets reacted awfully (the Rand plunged 12-15% against USD). He eventually appointed former FM Pravin Gordhan, which helped soothe some investor concerns.
There is a fair amount of consolidation-type deal activity in the mining space because any cash-rich company with an interest in commodities views this as prime-time buying season.
Miners with strong balance sheets, even ones with mediocre cash flows, are buying up geared assets which may not be able to sustain production.
So even though oil, gas, and metal prices have plummeted, more deals than expected are taking place – but many of them are smaller asset sales rather than huge mergers.
Many private equity firms came here in 2008 – 2009, drawn by the strengthening ZAR and growth opportunities, but are now struggling as they try to exit their investments. Local currencies have been a letdown and are killing returns.
The top three biggest countries for deals are South Africa, Nigeria, and Kenya, followed by Ghana and Tanzania.
Q: Speaking of deal activity, is there not much happening due to the economy?
Or are the local banks still active, but working on smaller deals?
A: There isn’t much activity at the big international banks because the deal sizes are too small ($100 – $200 million USD) for them to bother.
You see “barter trades” where large banks, at times, give away small deals to smaller banks, and then the local banks call on the larger banks’ expertise for international deals; both sides usually have a partnership promise and arrangement.
Another issue is that few companies in Africa are willing to pay the fees that large banks charge (~$3-6 million for deals under $1 billion), so deals are often passed on to local firms that charge less.
Another trend is that many South African companies are buying overseas assets in places like the UK, Australia, the U.S., and the UAE – several retail and healthcare firms have done this recently.
Q: Um… but didn’t the ZAR just fall by 40% over the past year?
A: Yes, but everyone thinks it’s going to decline even further in the future.
Most people are expecting a credit rating downgrade on government bonds, and there are few drivers to strengthen the currency in the next 6-12 months.
South African economic growth is also way down, with growth rates similar to developed economies (<1% for 2016); even Nigeria is looking at < 5% growth.
Q: OK, so the strategy is “Get in now and gain exposure to other currencies before things get even worse.”
What about capital markets activity?
A: There’s a decent pipeline of offerings, but most of them are smaller – $400 to $500 million companies selling 20-25% stakes – so the international banks are staying away.
Whenever something slightly bigger comes along, everyone ends up pitching for it – like everywhere else in the world.
The bulge-bracket banks also stay away from many African IPOs because of “limited risk appetite and reputational concerns,” which is a nice way of saying, “This company might be lying about everything in its financial statements, and we don’t want to look fraudulent by backing them.”
This point is not as much of an issue in South Africa, which has decent transparency and governance, but it’s a big problem in places like Kenya, Nigeria, Ghana, Angola, and Mozambique.
Breaking in and Closing Deals: Diamonds in the Rough
Q: Thanks for sharing all that.
Previous interviewees have mentioned the importance of the Chartered Accountant (CA) designation in South Africa – do you think it’s still essential?
A: Historically, yes, banks have always favored CAs and candidates who have worked at Big 4 firms. Most of the Directors, EDs, and MDs who have been in the business for 10-15+ years have the designation.
But I think this trend is starting to change.
When we hire an Analyst, we don’t care if he/she is a CA since anyone can learn the required skills.
In the past few years, only around 50% of our hires have been CAs.
We also hire graduates straight out of university without much experience and then put them through a 6-12 month graduate program.
Q: OK, so it sounds like the CA is still quite common though maybe not “essential.”
Besides CAs and fresh university graduates, what other types of candidates are you looking for?
A: We also hire quite a few bankers from local firms that are looking to move up-market.
If you’re moving from a local bank to a large international bank, expect your experience to be discounted.
For example, if you’ve worked for 1-3 years as an Analyst at a local bank, you might start over as a first-year Analyst at an international bank. If you’re great, you might get to start as a second-year Analyst.
Since many of the deals at local banks are smaller, less complex, and more process-driven, we usually assume there’s some gap in your knowledge and technical expertise.
Q: Thanks for explaining that.
What’s the recruiting process like? Are case studies becoming more common?
A: At the international banks, the process works like this:
- We do an initial phone interview.
- If we like you, we’ll invite you in for in-person interviews.
- If you do well, we’ll give you an offer afterward.
- If we have some doubts, we’ll give you a case study and use your performance on that to decide.
The case study might be something like “Company X has these financial stats and follows this strategy. Which of these five companies should it acquire or sell to, and why?”
You could complete the exercise in about an hour; it’s not about complicated math or modeling, but verifying that you know what you’re talking about.
The local banks pretty much put you through a standard Superday where you meet everyone on the team and find out about your offer status at the end. However, they often delay this decision and take 2-3 weeks to respond to you, even if you win an offer.
Q: I see. So the case study is a part of the process, but you won’t always get it if the team is confident of your skills.
What about the deal process?
What are some challenges you might see in an M&A or capital markets deal there that you wouldn’t find in other regions?
A: The main problem is that disclosures are poor, even for publicly traded companies.
South Africa has the strongest transparency, governance, and disclosures, but in countries like Kenya and Nigeria you never know what you’re dealing with.
You might find illegal businesses, fraudulent financials, ethically questionable “side businesses,” and so on.
On the valuation side, many countries do not have risk-free rates because they don’t have 10-year government bonds.
So you have to come up with bottoms-up assumptions based on the additional risk beyond government bonds of developed markets.
Since there are so many cross-border deals, currency fluctuations are a major concern.
If you’re using USD to buy assets but the company earns its revenue in a local currency, you should be concerned. Or at least, have a way to hedge FX risk…
The Johannesburg Stock Exchange is the best-governed one in Africa, so international banks often work on offerings there.
But they stay away from many deals in Kenya and Nigeria due to the added risk and the small offering sizes.
With debt issuances, the two major international players are JPM and Citi; GS and MS are not heavily involved, BoAML doesn’t do much, and the European banks are also less involved.
Q: Previous interviewees have mentioned reduced hours, but also reduced compensation.
Is this still the case?
A: I would say so, yes. You will work more at international banks (75-80 hours per week) than at local banks (55-60 hours per week), but both are “investment banking lite.”
Local banks also tend to pay less than international ones, and you make significantly less in USD, EUR, or GBP – especially with the crashing exchange rate. But you could still come out ahead on a PPP basis.
One of the differences in South Africa is that they may reward top performers more than in London.
For example, an average Associate here might earn a bonus of around 1x his/her base salary, but a top-ranked one might earn 1.5x.
Analysts might earn a bonus of around 70-75% their base salary, but top performers still might earn a fair amount more than average ones.
Q: And what are your options after working in IB for a few years?
A: Bankers at the local firms here often try to move to international banks, unless they value the work environment and want to stay local. Smaller private equity funds are another common destination.
If you’re already at a large international bank, you’ll probably try to move to London (most common), NYC, or HK (rare), work there for 2-3 years, and then move somewhere else after that.
A decent number of bankers also move into mid-sized or large-cap PE funds directly.
Carlyle has a Sub-Saharan Africa fund that has been active over the past few years, and KKR and Blackstone have both funded agricultural and infrastructure/energy projects here.
It’s not as common to move into corporate finance or corporate development, and hedge funds are also less common and less developed (the entire industry here had less than $5-10 billion AUM as of the time of this article).
Having said that, some U.S. and UK-based hedge funds have invested in Africa.
Q: Great, thanks for explaining all that, and thanks again for your time.
A: Sure, anytime.
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