The new Egyptian government’s public prosecutor has reportedly banned Citadel Capital’s head, Ahmed Heikal, from travelling – on the back of the new governments investigations into a 2001 cement deal.

The public prosecutor’s allegations are understood to centre on corruption, embezzlement of public money and profiteering, in relation to the privatisation of Helwan Portland Cement Company (HPCC). From reports, it appears that the prosecutor seems to believe that Heikal conspired with the then prime minister, Atef Obeid, on the transaction – who has also been handed a travel ban.

However the private equity investor has published a statement to say that  it  did not purchase the asset from the government, and in fact only got involved in the deal three years after it had been privatised.

HPCC was in fact purchased from the government by the Arab Swiss Engineering Company, through its affiliate Al-Ahram Cement – which acquired 75% of the company.  Arab Swiss was at the time 49% owned by Omar Amin Roshdy Gamei, while the remaining stake was held by a group of other cement companies.

Upon Gamei’s death in 2004, UBS was hired to manage the sale of his shares in Arab Swiss, which Citadel Capital purchased through its entity Al-Wataniya Trade and Development. Over the next year, Citadel progressively purchased the remaining stake in Arab Swiss, and by the end of 2005 was the full owner of the entity.

As such, according to its records, Citadel did not acquire HPCC from the government, but rather through its acquisition of Arab Swiss. As a matter of fact, Citadel was not in existence as a private equity group in 2001, as it was only formed in 2004.

It will be very interesting to see how the public prosecutor counters Citadel’s argument, on its account of how it came to acquire HPCC. One wonders whether the government actually has real evidence or if it is a witch hunt to appease the  discontent of the masses on the wealth that has been amassed by some members of society – whether legitimate or not.

With Egypt and South Africa long hailed as the most advanced private equity markets in Africa, this occurrence may cause investors to re-think Africa’s political risks. However, this may just be yet another hurdle Africa’s private equity market has to jump on its path to maturity, emerging stronger as a consequence. Or maybe  the Citadel case will be a landmark opportunity to display that the industry is indeed resilient to the continent’s political risks.

The investors were speaking at the Africa Investor conference, on March 24 in London which covered both public and private equity investments across the Africa. The speakers agreed that although committing capital to the continent carries some risks, the challenges are not very different from those posed by other emerging market regions.

“Perceptions of the risk in Africa are out of the kilter with the actual risks,” said Sven Richter, managing director, frontier markets, Renaissance Asset Managers. “To a large extent – people do not really know the continent, and people always fear for what they do not know.”

Zimbabwe was cited as one of the countries suffering the largest gap between perception and reality. With the Mugabe regime still at the helm of power, global LPs and GPs fear political interference in investments. GPs active in the country however say policy makers have taken significant strides to welcome investors. Recent regulatory changes include slicing corporate income tax rate from 30% to 25%, and capital gains tax from 20% to 5%.

“The biggest gap I have found between perception and actual risk is in Zimbabwe,” said Nicolas Clavel, chief investment officer at Scipion Capital. “We travelled to Zimbabwe, to see companies and policy makers  in order to gauge the extent of political risk – and we came way very bullish on the country based on  the economic prospects and policy choices that are likely to be made moving forward.”

The speakers admitted that political risk is still a concern across a number of African nations, but cited a number of innovative ways of mitigating the risk. One buffer that the investors are increasingly looking at is the use of World Bank’s Multilateral Investment Guarantee Agency (MIGA) contracts.

A typical MIGA contract is structured to protect investors against the risks of expropriation, war and civil disturbance and breach of contract. The protection also covers the non-honoring of sovereign financial obligations and transfer restriction, including inconvertibility.

Exit risks were also highlighted as an area of concern, particularly in private equity deals. With a good number of African stock exchanges still marred by poor liquidity and the secondary private equity market still in its infancy, exiting deals remains a challenge for investors. However some are working round this by listing on multiple exchanges. Others are opting for mezzanine deals, combining debt and equity, so that the investors receive an income while waiting to exit.

“In [some countries] you cannot be too optimistic that you will be able to exit through a listing on the stock market in three to five years,” said Zain Latif, principal at TLG Capital. “So we have to be creative in the way we come out of investments, and try to employ structures like convertible loans – which provide an income stream every year, and also create an incentive for management teams.”

Other key risks cited by the investors include management risk – the importance of ensuring that they can trust the management running target companies – both in private and public equity investments. This is as the most part of Africa continues to struggle with availability of accurate data, both from the overall financial markets and target companies. Being thorough in management due diligence and getting to a level of high trust in the management is therefore key to managing this risk, the investors said.

Investors called for better education of global investors on the true risks inherent in the region as a driver of narrowing the risk perception-reality gap. Primary research, including investor visits to target country’s to meet management teams and regulators would also go a long way to bolster confidence. Prospective investors will also have to take a closer look at Africa’s demographics and how they compare across emerging markets.

“Perception is a major problem for Africa,” said Clavel. “There are more families in Africa earning $20,000 per annum than in the whole of India and yet more people put their money in India, because they perceive it as an opportunity, and Africa as a risk.”

Kenya, Mozambique, Rwanda, Uganda and Zambia made up about half of the 11 countries that were upgraded on the basis of having reduced the risks linked to doing business in the country. The results were published as a risk map by Aon, a global insurance broker, in conjunction with Oxford Analytica, an academic consultancy.

“This year’s map highlights the continued emergence of several markets in Africa, such as Ghana, Gabon and Nigeria, where more international trade and investment is occurring,” said Beverley Marsden, associate director, Aon Risk Solutions Crisis Management Practice.

The map highlights how the overall risk of investment loss and default due to political factors has changed in individual countries since 2004. The risks analysed include sovereign default, war, civil unrest, legal risk, political interference and the ease of getting payments out of a country – referred to as exchange transfer. The results were drawn from a global network of more than 1,000 experts and academics, which made independent judgments on global geopolitical risks.

Nineteen countries were downgraded on the 2011 risk map, including Iceland, which this year became the first Western European country to be added to the list.  The downgrade list was mainly made up of countries in the Caribbean islands, which took up 13 of the 19 slots.

Algeria and Benin were the only African countries to be downgraded, even though a number of African countries were highlighted as posing significant risks in specific areas.

Madagascar and Niger were the only two African countries that were singled out for strong prospects of war or insurrection. Angola and Chad were found to face a significant level of having sabotage, riots, civil commotion and terrorism, while Benin and Zambia were singled out as posing the risk of investors losing assets due to host government expropriation or nationalization.

Algeria, Burkina Faso, Central African Republic, Chad, Guinea Bissau, Guinea Conakry, Madagascar and Niger were highlighted as having a high possibility of being unable to make payment in the contract currency due to the imposition of local currency controls or the possibility of being unable to transfer currency outside the host country.

“Political risk will continue to be a major influencer for businesses transacting in emerging markets in 2011,” said Marsden. “A new norm in world trade is being established. We believe that political risk will remain elevated while the markets are unstable, but will return to traditional levels as the world economy improves.”

Last year, Rwanda, Cape Verde, and Zambia  topped global charts as the most improved regulatory environments for starting a business, according to a joint International Finance Corporation and World Bank report.

The South African Rand Currency Index (RAIN) tracks the rand’s movements against the euro, dollar, pound, yen and China’s yuan. The weighting of each currency in the index will be calculated using trade data from the South African Revenue Service. The currency index will be calculated and distributed by the JSE on a daily basis and will be listed on the Yield-X platform.

“The objective is to summarise the effects of rand appreciation and depreciation against foreign currencies in the competitiveness of SA goods relative to goods produced by South Africa’s main trading partners,” said the JSE.

RAIN has been structured to enable the investors to gauge the financial market pressure on the Rand, and can therefore also be used as an FX risk management tool, the JSE said.

The three countries are among the 10 economies globally that most improved the ease of doing business for local companies in the past year, according to the Doing Business report. The research analyzes regulations that apply to an economy’s businesses including start-up and operations, trading across borders, paying taxes, and closing a business.

“These welcome developments are another reminder that regulatory cooperation between economies pays off,” said Janamitra Devan, the World Bank’s vice president for financial and private sector development. “About 30%of global trade facilitation reforms in the past year took place in Sub-Saharan Africa alone.”

Of the three Rwanda topped the list, for having implemented 22 business regulation reforms between 2005 and 2010, reducing the number of procedures required to set up a company to only two, with the cost of start-ups dropping to 8.9 % of income per capita.  This is compared to 223% of income per capita and nine procedures in 2005.

Cape Verde ranked second, making starting a business easier by computerizing its licensing system, easing property registration, and abolishing some stamp duties. Zambia came in third for eliminating its minimum capital requirement, computerising customs declarations, and introducing an electronic case-management system in the courts.

According to the survey  released May 2009, Sub-Saharan Africa risk premium – the risk of investment relative to developed markets – stood at 8.4% , about 1.7 points higher than 2008.Russia and the Commonwealth of Independent States regions also had a risk premium of 8.4%, having risen about 1.4 points from last year.

North Africa risk stood at 8%, 1.3 points higher than last year, while South Africa recorded 7% 0.6 points higher than last year.  Brazil, India, China and Central and Eastern Europe were perceived to have the lowest risk in emerging markets at 6.4%, with Brazil the only region signaling a drop in risk premium – 0.5% less than 2008.

The EMPEA surveyed 156 global private equity investors – limited partners, who invest in funds – as opposed to general partners who raise the funds. Click here for full report.

The new indices are designed to provide investors with access to Africa’s developing equity markets, benchmarking the performance of these markets. The S&P Pan Africa Index coversBotswana, CoteD’Ivoire, Egypt, Ghana, Kenya, Mauritius, Morocco, Namibia, Nigeria, South Africa, Tunisia and Zimbabwe.

The S&P Africa Frontier Index covers eight smaller frontier markets from sub-Saharan Africa, including Botswana, Cote d’Ivoire, Ghana, Kenya, Mauritius, Namibia, Nigeria and Zimbabwe. The indices aim to capture 80% of the total market capitalisation of each country, and thus providing investors  with a benchmark on African markets.

The S&P Africa 40 Index is designed to provide tradable exposure to 40 ofthe largest and most liquid companies that operate purely in Africa. To qualify for inclusion, Companies must be domiciled in Africa or have the majority of their assets and operations in Africa.

The index is dominated by companies from the financial, materials, telecommunications and industrials sectors, with MTN Group (SouthAfrica), Orascom Construction (Egypt), First Quantum Minerals (Zambia) and Standard Bank Group (South Africa) among the largest constituents.

The S&P Africa 40 recorded returns of 36.35% from March 2007 to March 2008, and 49.78% annualised on a three year basis. The S&P African Frontier Index gained over 52% for the three years up to 2008 while the S&P Pan Africa Index gained over 18% in the same period.

“The strong performance of many African markets has made the region an increasingly attractive investment opportunity. These three new indices provide investors with a unique exposure to the African equity markets,” said Alka Banerjee, vice president of portfolio services at Standard & Poor’s.

The indices provide a platform for the creation of financial products such as index funds, warrants, certificates and exchange traded funds. The FTSE/JSE All Africa 40 Index will consist of the top 40 companies by market capitalisation from Egypt, Côte d’Ivoire, Kenya, Morocco,Mauritius, Nigeria, South Africa and Tunisia . The FTSE/JSE All Africa ex South Africa 30 Index will consist of the top 30 companies by market capitalisation from Egypt, Côte d’Ivoire, Kenya,Morocco, Mauritius, Nigeria and Tunisia.

“Providing investors worldwide with access to the African continent is an important part of the JSE’s total Africa strategy, which also includes collaboration with other African exchanges and offering issuers the opportunity to dual list on our Africa Board,” said Russell Loubser, JSE CEO. “By partnering to form these indices, FTSE and the JSE are improving the visibility of the high quality companies that exist across the continent.”

Both indices are designed to be representative of the markets covered and the weighting of any single country is capped at 40% of the indices.  The constituents will be reassessed on a quarterly basis.

“Interest in African equities is on the rise both from international and domestic investors,” said Imogen Dillon Hatcher, FTSE’s managing director for Europe Middle East and Africa. “It is part of FTSE’s strategy to provide institutional investors with an accurate benchmark as well as serve as the basis for innovative investment products.”

The ETF, whose market capitalisation reached $587 million at the beginning of November, tracks the Morgan Stanley Capital International ( MSCI) South Africa Index . The Index seeks to measure the performance of the South African equity market – a capitalisation-weighted index aiming  to capture 85% of the total public equity market capitalization.

ETFs are investment funds tracking an index, units of which can be bought and sold on a stock exchange, enabling structured access to underlying assets.

The ETF invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Barclays Global Fund Advisors is the fund’s investment advisor and the Index is reviewed quarterly by MSCI.  Index constituents include the MTN Group, Sasol Limited, the Standard Bank Group, Gold Field Limited and Firstrand Limited.

Market Vectors-Africa Index ETF (AFK) was launched in July last year, aimed at attracting investors looking to invest in investments in Africa.  ETFs are investment funds, tracking an index, units of which can be bought and sold on a stock exchange, enabling structured access to underlying assets. The ETF tracks the the Dow Jones Africa Titans 50 Index and as of November 6, the ETF had clocked 30.2% in year-to-date returns.

AFK gives investors access to companies in  Angola, Democratic Republic of the Congo (DR Congo), Egypt, Equatorial Guinea, Ghana, Kenya, Mali, Morocco, Nigeria, South Africa and Zambia.  The index is weighted by float-adjusted market capitalisation  and each country’s weight is capped at 25% with weights of individual components capped at 8% with a maximum of 15 companies per country. Companies in the index must also have a minimum market cap of $200 million and a minimum three-month average daily trading volume of $1 million. See table for top constituents