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Chicago Tribune Business Section 2 Wednesday, July 24, 2013 3 FOCUS AFRICA Continent makes grade for university investors Frontier markets tempting for deep-pocketed U.S. institutions mm -r' ft' 'fit Wit BY TOSIN SULAIMAN Reuters America's wealthiest universities are venturing into Africa's fast-growing frontier markets in search of outsize investment returns that will allow them to offer scholarships, lure top professors and fund research. For sub-Saharan Africa, recognition from these deep-pocketed U.S. institutions, which have often earned envy among fellow global investors for their strong returns, marks a significant shift American university endowments, the 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 more than $400 billion.

other large schools investing in Africa include the University of Michigan, the University of Notre Dame and the University of Wisconsin. Among them, these institutions manage about $50 billion. The Rockefeller University, a biomedical research institute in New York with about $1.7 billion in assets, expects to make an allocation to Africa this calendar year and has identified outside managers, said Amy Falls, chief investment officer. For 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 Scott Malpass, chief investment officer.

"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. Moving carefully 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 ended 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.

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. The small size and illi-quidity of the region's capital markets are another worry, especially for the richest universities, whose assets can dwarf the gross domestic product 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 Common-fund, which manages more than $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," Adeosun said. "They're all chasing an 8 percent-type return." Short-term securitiescash other: 4 Domestic equities: 15 Fixed ki income: '''if' Capital Management, said endowments' interest in Africa began after the 2008-09 financial crisis. He estimates that 10 to 15 percent of these institutions are 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. Patience 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 (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 provide more diversification for the investors.

U.S. endowments' awak- Endowment returns rebound A study of endowment data gathered from 831 U.S. colleges and universities suggests some long-term average returns have increased, while short-term annual returns have decreased. Performance is attributed to diversified portfolios, long-term commitments to less-liquid strategies and greater resources. The combined institutions had assets of $406 billion for fiscal year 2012.

AVERAGE ENDOWMENT NET RETURN Total combined institutions FY 2011 FY 2012 ENDOWMENT ASSET ALLOCATIONS 2012 Total combined institutions Alternative strategies: 54 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 Standard Poor's 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 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 said. "You have to look everywhere for growth." It is difficult to know 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 Annual 19.2 3-year 31 10.2 47 1 1-1 10-year 5.6 10.7 6.2 International equities: 16 equity, leveraged buyouts, mezzanine and acquisition funds, international derivatives, venture capital, real estate, and distressed debt. PERCENTAGE CHANGE of Endowments conference in Cape Town, South Africa, this year that Africa's reality is different than what is often reflected by media.

"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 the university organization, lnclude private funding, mergers private equity, commodities Hotel operators see room for expansion in SOURCE: ACUBO-Commonfund Study ening appetite for Africa is another sign that the continent is shedding its 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 said at a private equity HILTON PHOTO gross domestic product growth of 5 percent annually through 2016, Economist Intelligence Unit Ltd. said.

"Africa's middle class is almost as large as the entire populations of Russia and Brazil combined," Hassan Ahdab, Starwood's regional vice president for the Afri which oversees investments for the University of Texas and Texas systems, with assets of about $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 10 biggest U.S. endowments, lifting domestic and international business demand for lodging, according to Ahdab. Growth on the continent is most dramatic in sub-Saharan Africa Planned developments, which include new properties by luxury-hotel operator Kempinski in Nairobi, Kenya, are up 23 percent from last year by number of rooms, compared with a 9 percent increase in North Africa, which is a bigger, more mature lodging market with such tourist draws as Morocco and Egypt, Ward said. In the Asia-Pacific region, planned hotels are up 8.5 percent, while in Europe the increase is 4 percent, according to Henderson-ville, Term.

-based research company STR Hilton is among the largest hotel operators in Africa. The McLean, Va. -based company, owned by U.S. Africa private-equity firm Black-stone Group LP, has the most rooms planned on the continent, with a pipeline of 6,230 at 23 hotels, according to a Hospitality survey. That's up 84 percent from the number of rooms Hilton had planned last year.

Marriott plans 3,900 rooms at 22 hotels, Hospitality said. Chic ago -based Hyatt Hotels which has six high-end hotels on the continent and two under development, both in Morocco, plans to open hotels in cities such as Lagos; Nairobi; Addis Ababa, Ethiopia; Accra, Ghana; and Cape Town, South Africa, to capitalize on Hyatt's customer base in China. Starwood Hotels, which is scheduled to open a St. Regis in March 2015 in Cairo, plans to increase the number of its properties in Africa to 50 by 2016 from 38 today. can and Indian Ocean region, said in an email.

"The boom in sub-Saharan Africa is attracting business talent from the rich world." The sub-Saharan region includes Kenya and Tanzania in the East, Nigeria in the West, Angola in the Southwest, and South Africa and Botswana in the South. Urbanization in Africa is being driven by one of the world's youngest populations, said Trevor Ward, principal at Hospitality, citing data from the International Monetary Fund. The median age in Ethiopia and Nigeria is 18, compared with 37 in the U.S. and almost 46 in Japan and Germany, according to the Central Intelligence Agency's World Factbook. Those demographic trends, combined with rising exports of oil and minerals from such countries as Nigeria and Angola, are By Nadja Brandt Bloomberg News Marriott International Starwood Hotels Resorts Worldwide Inc.

and Hilton Worldwide Inc. are turning expansion efforts to Africa, where a growing middle class and rising travel are fueling the fastest pace of hotel development in the world. Marriott has increased the number of hotel rooms it plans on the continent by 55 percent from last year. For Starwood, revenue per available room in Africa and the Middle East is the highest of any region worldwide. The high-end Transcorp Hilton Abuja, in Nigeria's capital, commands some of the steepest management fees in the world for its operator, according to Lagos, Nigeria-based hotel-consulting firm Hospitality Group.

Hotel investors and op- Hilton, which owns the Transcorp Hilton Abuja in the Nigerian capital, is adding 23 hotels on the continent. erators, finding growth slowing in mature European and U.S. markets, are expanding in Africa as the continent is buoyed by increasing trade with countries including China and rising demand for services such as lodging. More than half of Africa's countries probably will post.