East African Investors Navigate Complex Landscape of Alternative Assets

Institutional investors in East Africa are gradually moving away from their long-standing reliance on government securities, a shift encouraged by declining yields on sovereign debt. For decades, these investors, including pension funds and insurance companies, heavily favored government paper due to its high returns, low risk, and regulatory appeal. However, as yields on these traditional assets compress, the attractiveness of alternative investment classes like infrastructure, private credit, and trade finance is growing.

Despite the allure of diversification, the transition to alternative assets is not without its hurdles. A significant concern is the “look-through” problem, where investments that appear diversified, such as bank stocks, are often heavily exposed to government securities themselves, thus not truly mitigating sovereign risk. Furthermore, currency volatility adds another layer of risk to local currency-denominated government bonds, prompting a move towards dollar-denominated funds for hedging purposes.

Taxation presents a substantial barrier, particularly in Uganda, where a high capital gains tax on private equity exits can make the asset class structurally unattractive. Misconceptions about liquidity also persist, with many viewing alternative investments as permanently locked up, a perception that, while evolving, still impacts decision-making.

The legacy of past failures, notably the collapse of Abraaj Capital, has also cast a shadow, leading to heightened scrutiny on governance and risk management practices. This scar tissue necessitates robust due diligence, focusing on regulatory compliance, board structures, and investment controls.

While private equity faces challenges, infrastructure, with its tangible assets and straightforward investment story, is gaining traction. Similarly, private credit and trade finance are proving popular due to their shorter-term nature, recyclability, and clearer exit strategies. The need for African capital to fund African projects is becoming more pronounced as external funding sources tighten.

To unlock the full potential of alternative investments, significant changes are required. A shift from quarterly performance evaluations to longer-term horizons is crucial, alongside building internal capacity for asset valuation and risk assessment. Ultimately, a philosophical change is needed to break the cycle of concentration risk and embrace a more diversified investment strategy,

Source: Daily Monitor (Uganda)