Q&A with Clifford Sacks of Renaissance Capital

In July of 2010, RenCap completed a sizable acquisition in South Africa. Can you discuss what this transaction means to your operations?

Sacks: Yes, we bought BJM Securities, a preeminent research broker in South Africa. The company is now being rebranded Renaissance BJM Securities.

We have more than tripled our research presence on the continent with this acquisition. We’ve now got, by some distance, more commitment in research than any other bank across Africa.

Do your expansion plans include setting up shop in other African countries?

Certainly. We currently have offices in Johannesburg, Lagos, Nairobi, Lusaka and Accra. We are also converting an operation in Zimbabwe into a full-fledged shop. The missing piece of the puzzle is North Africa, and that’s why we are now looking at opportunities in Egypt I think that’s a 2011 initiative which, once completed, would give us the most extensive, on-the-ground footprint of any bank in Africa.

Why is it critical to RenCap to have an on-the-ground presence?

Our model is different from other banks. Many banks will tell you they can trade in 20 countries, but that’s because they are using a broker network and not their own operations. We use the broker network in countries where we don’t have presence, but ultimately we prefer to use our own Renaissance employees to do the research and execution. We can now offer that in all the important, more-liquid countries in Africa, barring North Africa.

Where is the capital flow into Africa coming from at the moment?

We have seen a significant amount of investor interest from South Africa over the last couple of years. We think the South African fund managers are probably ahead of the pack in understanding and committing to Africa. We also see various other funds from different parts of the world, mostly in the United Kingdom, Europe and the United States. There is investor interest in Africa globally, which is a trend that is growing, not diminishing.

What sectors or industries do you find most attractive?

For us, it is mining, oil and gas– in other words, natural resources. We’re interested in financial services and telecommunications, and we intend to cover actively other sectors such as food and agriculture.

A lot of foreign investments are directed at Africa’s natural resources, such as oil and gas. Is that where you see the most growth?

We think our connectivity with the CIS and Russia gives us a good understanding of the energy sector. The entire West Coast of Africa is alive with these opportunities. Nigeria, Ghana and Angola  have massive amounts of production and reserves in both oil and gas. There’s a huge amount of activity in iron ore and copper, as well. Africa is a veritable treasure trove of natural resources.

I’ve heard the argument that the interest in Africa’s natural resources compared to, say, the financial services sector, is so disproportional that it may be hindering the development and protection of wealth on the continent. What do you think?

I think there are pockets of explosive growth in the financial services sector. Take Nigeria, for instance; there is a banking industry that is becoming increasingly sophisticated and has significant growth potential. If you look at South Africa , the banks are world-class and very sophisticated. Your point, however, is a good one because in many other areas the financial services sector is underdeveloped. But we certainly think that will improve over time.

What do you think of the opinion that investments in Africa are heavily dependent on commodities, which is risky because of the inherent cyclicality in that asset class?

I think it could be a good thing or a curse. It depends on how the different countries handle their natural wealth. Governments that have a growing sense of responsibility in terms of monetary and fiscal policy, who take the corruption issue seriously, who take corporate governance seriously and who do the right things are in the long term going to be fine. Many of these decisions are painful, and you really have to be thinking long term. Those that are very short term in their thinking are going to see all of their natural wealth wasted.

How much consideration as an organization do you give to government stability when you’re evaluating an investment in any particular African country?

It is critically important to us. Clearly, when you are putting a footprint in Africa you need to have an appetite for risk and an understanding of the risk you are taking. We are obviously very watchful of issues around corporate governance and are far more comfortable with countries who take those issues seriously. It is a very serious consideration for us.

Has the financial crisis helped divert more investment capital from so-called safe havens to places like Africa?

Yes, but to be clear, in the height of any crisis when there is an aversion from risk, all the emerging markets will see capital flows wane. Africa is no exception. Capital to the continent ebbs and flows. As with any other emerging market, when there is a return to risk, you see flows into emerging markets. Africa is at the front of the queue on that.