Chapel Hill Denham Managem ent Limited...Chapel Hill Denham Management Limited V governance...

Chapel Hill Denham Management

Limited

Final Rating Report

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2019 Investment Manager Rating: Chapel Hill Denham Management Limited

Chapel Hill Denham Management Limited

Rating: A(IM)

RATING RATIONALE

Agusto & Co. affirms the ‘A(IM)’ rating assigned to Chapel Hill Denham

Management Limited (‘CHDM’ or ‘the Manager’). The rating reflects the

Manager’s good research function, strong governance around portfolio

management, well-defined and established processes for decision-making,

trade execution and risk management. CHDM’s good investment

management capabilities is upheld by a team of well-qualified and

experienced professionals.

CHDM is a wholly owned subsidiary of Chapel Hill Advisory Partners – a

leading investment service provider with operations in Nigeria and Ghana.

With well over ₦60 billion of assets under management and two decades of

financial services to both retail and institutional investors, the Manager has

grown capabilities in traditional and alternatives investment management.

CHDM currently manages three mutual funds and Nigeria Infrastructure Debt

Fund (NIDF) – the first infrastructure debt fund in Nigeria. There are plans to

further diversify into alternatives investments with the launch of a Real

Estate Investment Trust (REIT) and SME fund in the near term.

Chapel Hill Denham Management’s dedicated research and strategy team

play a fundamental role in decision-making by defining a pool of eligible

securities for investment management and viable sectors for alternative

investments. The head of the team joined the Manager in 2012 and has over

12 years of investment research experience. Research combines detailed

qualitative & quantitative analysis of the macroeconomy, companies and

investment securities, supported by standardised methodologies and work

tools including the Bloomberg Terminal, Euromonitor and third-party

research publications.

The Manager’s investment process is upheld, a multi-layered governance

structure, which includes a regulatory investment committee, an internal

investment committee (Investment Strategy Committee) and a dedicated

advisory board for the NIDF. The committees and advisory board comprise

highly qualified members with vast experience in investment management.

In the absence of physical meetings, the committees approve investment

strategies via email.

Investment management

company is considered to have

GOOD investment and risk

management capabilities

Issue Date: 7 November 2019

Expiry Date: 7 November

2020

Previous Rating: A(IM)

Industry: Asset Management

Analysts:

Mariam Dabiri, CFA [email protected]

Wonuola Kunle-Bello [email protected]

Agusto & Co. Limited

UBA House (5th Floor)

57, Marina

Lagos

Nigeria

www.agusto.com

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Management of investment risk is the joint responsibility of the Investment

Management, Risk Management and Compliance units as well as the

Investment Committees. Exposure to credit and market risk are managed

adequately through investment limits, credit appraisals and timely portfolio

reviews. In our view, the systems and processes for investment risk

management remain adequate for the current scale of operations.

The Manager has also maintained adequate operational checks and controls

through daily call overs and reconciliations, supported by dedicated risk,

compliance and internal control officers. Through a representation on the

Investment Strategy Committee and access to the Manager’s core operating

software, the risk management, compliance and internal control functions

are well integrated with CHDM’s decision-making process. The risk and

compliance officers provide exception and activity reports to CHDM’s

management, while the internal audit & control officer provides feedback to

the Board of Directors. Although current operational risk controls are

adequate, we note that the Manager’s whistleblowing platform is only

available to internal stakeholders with no avenues for anonymous reporting

by external parties.

During the review period, CHDM embarked on a software upgrade project to

enhance the IT framework, trade execution, data management and to lower

operational risks through automated pre and post-trade checks. A migration

from GALENO to the new software, Miles software was completed in Q1

2019.

Figure 1: Strengths and Challenge

• Multi-layered governance structure around portfolio management

•Experienced investment committees

• Experienced research team, with well-established processes and good quality reports

• Satisfactory internal control processes

Strengths

• The asset management industry's ability to attract and retain toptalent

Challenge

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MANAGER PROFILE Chapel Hill Denham Management Limited (‘CHDM’ or ‘the Manager’) is a wholly owned asset management

subsidiary of Chapel Hill Advisory Partners (‘the Group’) – a boutique financial institution involved in

investment banking, securities trading and investment management. The Group has four other subsidiaries;

Chapel Hill Denham Securities Limited, Chapel Hill Denham Advisory Limited, Paxhill Minerva Limited and

Chapel Hill Advisory Partners (Ghana) Limited. The Group also holds a 21% equity stake in Trustfund

Pensions Limited, a leading pension fund administrator in Nigeria.

CHDM was incorporated in July 1994, as Denham Management Limited and was renamed Chapel Hill

Denham Management Limited in February 2008, following the acquisition of Denham Management Limited

by Chapel Hill Advisory Partners Limited. CHDM acts as a wealth adviser and manages a wide range of

discretionary and non-discretionary portfolios. CHDM also manages three collective investment schemes

(mutual funds); the Paramount Equity Fund (formerly the Icon Unit Trust, Nigeria’s first mutual fund), the

Women Investment Fund and the Chapel Hill Denham Money Market Fund (formerly Nigeria Global

Investment Fund). As at 30 September 2019, the Manager had assets under management (AUM) of over

₦60 billion.

Over the last three years, Chapel Hill Denham Management Limited has evolved from a traditional asset

management firm to more of alternative investments, with the launch of Nigeria’s first infrastructure debt

fund, Nigeria Infrastructure Debt Fund (NIDF). The NIDF seeks to provide financing to bankable

infrastructure projects in Nigeria with a focus on key sectors including power, telecommunications,

transport and oil & gas. NIDF is listed on the FMDQ OTC Securities Exchange – Nigeria’s secondary market

for debt capital – and has invested over ₦31 billion in 12 infrastructure projects, with plans to raise

additional funds (the sixth series) before the end of 2019. CHDM’s alternative portfolio is expected to grow

considerably in the near term upon a successful launch of Nigeria Real Estate Investment Trust (NREIT)

and an SME fund.

Chapel Hill Denham Management Limited operates from its headquarters in 45 Saka Tinubu Street, Victoria

Island, Lagos and a branch office in Abuja.

Figure 2: Group Structure

Source: Chapel Hill Denham Management Limited

Chapel Hill Advisory Partners

Chapel Hill Denham Management

Limited

Chapel Hill Denham Securities Limited

Chapel Hill Denham Advisory Limited

Chapel Hill Advisory Partners (Ghana) Limited

Paxhill Minerva Limited

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BUSINESS STRUCTURE, GOVERNANCE AND STAFFING Governance

Chapel Hill Denham Management Limited’s governance structure remained unchanged in the 12 months

to September 2019. The Manager is governed by a three-man Board of Directors (BOD), chaired by Mr.

Olawale Edun, a veteran investment banker with over three decades of financial services experience. Other

members of the Board are Mr. Mobolaji Balogun (who serves as the Group Chief Executive Officer and

oversees the affairs of the asset management subsidiary, CHDM) and Mrs. Kemi Awodein (Managing

Director, Chapel Hill Denham Advisory Limited). The Board defines the strategic direction of the Manager

whilst ensuring a good risk framework and adequate internal control systems. The broad duties of the

Board are performed through an audit and risk committee.

In our opinion, the members of the Board are well qualified and have the requisite experience to adequately

govern the Manager’s affairs. Nevertheless, we note that there is no independent director on the Board,

which falls short of the Securities and Exchange Commission (SEC)’s code of corporate governance.

However, CHDM’s Board has since nominated an independent director and is currently awaiting SEC’s

approval.

Table 1: Board of Directors of CHDM

Name Position

Mr. Olawale Edun Chairman

Mr. Mobolaji Balogun Chief Executive Officer, Chapel Hill Advisory Partners and Managing Director, CHDM

Mrs. Kemi Awodein Managing Director, Chapel Hill Denham Advisory Limited


Mr. Olawale Edun joined the Board in 2008 and currently serves as the Chairman. He has over three

decades of experience in merchant banking, corporate finance, economics and international finance

gained at reputable local and international institutions. Between 1980 and 1986, Mr. Edun worked at

Chase Merchant Bank (later Continental) in Lagos where he rose to the position of Head, Treasury and

Deputy Head, Corporate Finance. Mr. Edun joined the World Bank/IFC in Washington DC, USA through

the elite Young Professionals program in September 1986. At the World Bank, he worked on economic

and financial packages for several countries in Latin America and the Caribbean, including the

Dominican Republic and Trinidad as well as Indonesia and India in the Far East. In 1989, Mr. Edun

returned to Nigeria as co-founder and Executive Director of Investment Banking & Trust Company

(IBTC) Limited, now Stanbic IBTC. In 1994, he founded Denham Management Limited and in 1999, Mr.

Edun was appointed as Honourable Commissioner for Finance in Lagos State, a position he held for

eight years. He holds a B.Sc. in Economics from Queen Mary College, University of London, England

and an M.Sc. in Economics from the University of Sussex, England.

Mr. Mobolaji Balogun is the Chief Executive Officer of Chapel Hill Advisory Partners and the Managing

Director of Chapel Hill Denham Management Limited. Mr. Balogun joined the Board in 2005. He took

over the affairs of CHDM following the exit of the erstwhile Managing Director (Mrs. Ononuju Irukwu)

in 2018. Mr. Balogun has over three decades of experience in the financial services and mobile

communications industry. He spent 11 years within FCMB Group, in investment banking and securities

trading, leaving the business in January 2001. From April 1993 to January 2001, he was Executive

Director and Chief Operating Officer at CSL Stockbrokers (part of FCMB Group). Mr. Balogun was also

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Executive Director at FCMB Capital Markets from January 1996, where he led advisory teams in major

corporate and complex transactions. He left FCMB Capital Markets in 2001 to become a co-founder

and Director of Econet Wireless Nigeria (now Airtel Nigeria). He led the capital raising and license

auction process for Econet Wireless Nigeria’s US$285million GSM license. He was a pioneer Chief

Business Development and Strategy Officer and in October 2001, was appointed Chief Marketing

Officer. Mr. Balogun left the telecommunications industry and returned to investment banking when

he founded Chapel Hill in 2005.

Mr. Balogun is the Chairman of Lafarge Africa Plc, was formerly Chairman of Nahco FTZ Limited and is

a Director at Nahco Aviance Plc. He is also a Director at Trustfund Pensions Limited, one of Nigeria’s

largest Pension Fund Managers and NASD Plc, the first OTC Market launched in Nigeria. He was

appointed to the Johannesburg Stock Exchange, Africa Advisory Board in September 2009 and was

Chairman of the investment banking trade group, the Association of Issuing Houses of Nigeria from

September 2010 to July 2014. The Managing Director of CHDM is an Economics (Honours) graduate of

the London School of Economics.

Mrs. Kemi Awodein

Mrs. Awodein is Managing Director, Investment Banking at Chapel Hill Advisory Limited. She joined

the Board in October 2014 and has about two decades of experience in investment banking and

management. She joined Chapel Hill through the business combination with Denham where she was

involved in executing transactions including IPOs, privatisation, equity raising and M&As. She also

managed the legal function at Denham, ensuring statutory and regulatory compliance. Before joining

Denham, she worked as an associate in the firm of Udo Udoma & Belo-Osagie, where she gained wide-

ranging experience in Company and Commercial Law. Mrs Awodein holds a Bachelors of Law from

University of Warwick, a Masters of Law from Nottingham University and was called to the Nigerian

Bar in December 1992.

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Organisational Structure

The Manager’s organisational structure remained relatively unchanged since our last review. The Board of

Directors remains the highest decision-making organ and provides the overall strategic direction of CHDM.

The Board delegates operational decision making to the Managing Director; Mr. Mobolaji Balogun, who

also serves as the Group CEO.

Whilst Chapel Hill Denham Management maintains an independent Investment Management team, the

Manager relies on Group shared services for key functions including Research, Sales & Relationship

Management, Finance & Operations, Information Technology and Risk Management & Compliance.

The Manager’s investment team comprises twelve portfolio managers (four assigned to private wealth &

mutual funds and eight for alternatives management (NIDF, REIT and SME). During the review period, the

REIT team was constituted, the SME team expanded while the NIDF team recorded one staff exit. In

compliance with PENCOM requirements, the NIDF has a Chief Executive Officer and Chief Investment

Officer. Mr. Anshul Rai and Mr. Mobolaji Balogun hold these positions. Overall, we believe the CHDM’s

investment team is well qualified.

Figure 3: Organisational Structure


*The NIDF also has a Chief Investment Officer (CIO), who doubles as the Group CEO and CHDM’s MD

Board of Directors

Support Service Units

Research

Sales and Relationship Management

Finance & Operations

Information Technology

Risk Management & Compliance

Private Wealth and Mutual Funds

(4)

Alternatives

Infrastructure Fund

(3)*

(REIT)

(3)

SME

(2)

Managing Director

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ANALYSTS’ COMMENTS – INVESTMENT MANAGEMENT

RESEARCH

People

CHDM has a dedicated research and strategy team that supports investment management through the

provision of macroeconomic, financial and industry-specific information to the Manager as well as other

subsidiaries within the Group. The team consists of six research analysts (including the head of the team)

and a research support staff. The head of the team, who joined the Manager in 2012, has over 12 years of

investment research experience gained at CHDM and the Stanbic IBTC Group. With an average cognate

experience of 6 years, we believe the depth of the research team to be satisfactory.

Systems

The Manager utilises a number of resources and information platforms including the Bloomberg Terminal,

Euromonitor, Central Bank of Nigeria (CBN), National Bureau of Statistics (NBS), credit rating agencies and

investor presentations for economic and financial market information. The research team uses MS Excel

models to analyse financial information, perform valuations and financial modelling. The team maintains

a research database (spanning over 10 years) on a shared drive stored on the Manager’s server. Research

is typically documented in a memorandum or report prepared in MS word and circulated to all subsidiaries

and clients via email.

Processes

The team employs a mix of top-down and bottom-up approach to research, with coverage divided into five

categories; macroeconomics, fixed income, currencies, equities and industries/sectors. The Manager’s

coverage sectors include telecommunications, agriculture, insurance, oil & gas and banking. An analyst is

assigned to a specific coverage area. The Manager’s equity research covers about 95% of large-cap stocks

on the Nigerian Stock Exchange All-Share Index. Research plays a fundamental role in the Manager’s

decision-making process by defining a pool of eligible securities for investment management. The research

team also provide a guide for selecting viable sectors or counterparties for infrastructure financing. The

output of the Research unit is largely sell-side but we note that the portfolio managers (private wealth,

mutual funds and alternatives) also conduct timely economic and credit analysis, which are relevant to

buy-side research, to support investment decisions.

All research reports undergo multi-layered reviews, first by a senior analyst and finally by the Head of

Research. The Head of Research is a member of the Investment Strategy Committee (ISC)1 or the internal

investment committee, which meets weekly to strategise on investment decisions.

In our opinion, the Manager has maintained a good research function, supported by well-established

processes, adequate systems and qualified research analysts.

1 Or the internal investment committee

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DECISION MAKING

The Manager has maintained well-defined investment decision-making processes through distinct

governance structures for traditional asset management (mutual funds and private wealth) and alternative

investments (NIDF).

CHDM Mutual Funds and Private Wealth

Governance Structure

In line with the Securities and Exchange Commission (SEC)’s regulations, the decision-making process for

the mutual funds are guided by investment committees (IC), also referred to as the Fund Regulatory

Investment Committee (FRIC). Each FIRC comprises five individuals including the Managing Director of

CHDM, the Group Chief Risk Officer, Chapel Hill Denham’s Head of Research and Strategy, an independent

member and a representative of the Trustees for the individual funds. All three FRICs are chaired by Mr.

Owolabi Salami a seasoned investment professional with three decades of investment management and

insurance experience. The committees meet once every quarter and define the strategic direction of each

fund. There were no changes to the committees during the review period.

Table 2: Members of the Fund Regulatory Investment Committee

Name Position

Mr. Owolabi Salami Chairman (Independent Member)

Mr. Mobolaji Balogun Managing Director, CHDM

Mr. Tajudeen Ibrahim Head of Research & Strategy, Chapel Hill Denham

Ms Oby Ugboma Chief Risk Officer, Chapel Hill Denham

A representative of the Trustees for the individual funds


Investment decision making for the mutual funds is supported by a multi-layered governance structure,

which includes an internal IC, also referred to as the Investment Strategy Committee (ISC). The ISC

comprises seven individuals including a number of business unit heads and the Managing Director. The

activities of the individual FRICs focus on defining the strategic direction of the mutual funds whilst the

ISC ensures these strategies are fully implemented and reflected in tactical investment decision-making.

As such, the ISC meets at least once a week and approves all trades executed by the Investment

Management team.

The ISC also provides strategic support to the private wealth team, for investment recommendations in the

management of discretionary portfolios. The committee ensures that investment strategies for these

portfolios are in line with the client’s predefined risk and return objectives (as contained in an investment

policy statement). For non-discretionary portfolios, the Manager acts on clients’ instructions and as such

the ISC does not provide oversight of these portfolios.

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Table 3: Members of the Investment Strategy Committee (ISC)

Name Position

Mr. Bolaji Balogun Managing Director, CHDM

Ms. Oby Ugboma Chief Risk Officer, Chapel Hill Denham

Mr. Tajudeen Ibrahim Head of Research & Strategy, Chapel Hill Denham

Mr. Akeem Sadare Managing Director, Chapel Hill Denham Securities Limited

Mr. Abidemi Oni Head of Finance & Operations, Chapel Hill Denham

Mr. Ifeolorun Ajayi Vice President & Head Treasury, Chapel Hill Denham

Ms. Kemi Ajayi Director, Shared Services, Chapel Hill Denham

Investment Decision-Making Process

The decision-making process for CHDM’s mutual funds and private wealth portfolios remains unchanged

from the previous year. The portfolio managers are required to make investment recommendations to the

ISC, guided by the Funds’ trust deeds, investment policy statements (for non-discretionary private wealth

clients) and a pre-defined pool of eligible securities. This pool is determined by the outcome of investment

appraisals conducted by the portfolio managers as well as the Research unit’s output on the

macroeconomy, money market, equity and fixed income markets. Subsequently, the ISC deliberates and

either approves or rejects the investment recommendation. Approvals are sought at the weekly ISC

meetings or via email communications intra-weekly.

Trade transactions for discretionary portfolios require the Managing Director’s approval while requests for

the mutual funds are approved by the Investment Management team lead.

In our opinion, the Manager’s investment process for the discretionary portfolios and mutual funds is

satisfactory, upheld by a strong governance structure and well-qualified decision-making committees.

Figure 4: Investment Decision Making Process for Private Wealth and Mutual Funds


Investment Proposal

ISC approves investment recommendation

Managing Director approves for private wealth clients

The portfolio manager team lead approves for mutual

funds

Trade Execution

ISC rejects investment recommendation

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Nigeria Infrastructure Debt Fund (NIDF)

Governance Structure

Decision making for the NIDF is the collective responsibility of the fund’s Investment Committee and

Advisory Board. The IC is responsible for defining investment strategies while the Advisory Board ensures

all investments are in accordance with the provisions of the trust deed.

Advisory Board

Principal functions of the Advisory Board include:

• Reviewing and approving related party transactions

• Reviewing NIDF’s compliance with the investment objectives

• Approving candidates for replacement of NIDF’s Investment Committee members

• Considering any other matters referred to it by the Manager, Trustees, Investment Committee,

Advisers or Unitholders

The Advisory Board is jointly chaired by the two representatives of the Trustees; STL Trustees Limited and

Stanbic IBTC Trustees Limited. During the review period, Mrs. Binta Max-Gbinije was replaced by Mr.

Charles Omoera as Joint Chairman of the Advisory Board, following the former’s exit from Stanbic IBTC

Trustees Limited. The Advisory Board meets twice a year.

Table 4: Members of the NIDF’s Advisory Board

Name Position

Mrs. Funmi Ekundayo Managing Director, STL Trustees Limited & Joint Chairman

Mr. Charles Omoera Chief Executive, Stanbic IBTC Trustees Limited & Joint Chairman

Mr. Eric Fajemisin Chief Executive, Stanbic IBTC Pension Managers Limited

Mr. Eguarekhide Longe Managing Director, AIICO Pension Managers Limited

Mrs. Joy Ojokavo Managing Director, Progress Trust CPFA Limited

Mr. Richard Eckrich Head, Infrastructure Nigeria Sovereign Investment Authority (NSIA)

Investment Committee

There were no changes in the IC during the review period. The IC is chaired by Mr. Philip Southwell, a

seasoned financial professional with over two decades of experience gained at local and foreign financial

institutions. The IC meets once every quarter and on a need basis. In our view, the IC comprise highly

qualified professionals, who we believe are capable of adequately steering the activities of the NIDF.

Table 5: Members of the NIDF’s Investment Committee

Name Position

Mr. Philip Southwell Chairman of the Investment Committee

Mr. Denis Clark Independent member

Mr. Mobolaji Balogun MD, CHDM and NIDF Chief Investment Officer

Mr. Anshul Rai Chief Executive Officer, NIDF

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Mr. Phil Southwell – Chairman, Investment Committee, NIDF

Mr. Philip Southwell is the Chairman of the NIDF’s investment committee and founder/CEO of Axius

Capital. Since its founding in 2013, he has led Axius in developing a unique investment framework for

infrastructure investments in emerging markets, focusing on channelling institutional capital into long-

term projects.

Mr. Southwell has a 25-year career in investment banking and principal investing, mostly focused on

emerging & frontier markets in Asia, Middle East, Central Europe and in Africa where he has been

operating continuously since 1998. management and operational joint-venture experience including

hiring and building local market teams; acquiring operating licences and being the accountable head of

regulated businesses in South Africa, Kenya, Nigeria, Egypt and Algeria; negotiating sale and purchase

agreements and joint ventures including with Equity Bank of Kenya; and setting up greenfield businesses

in Nigeria. He has been the lead adviser on many African landmark transactions including leading a

capital raising for Sterling Bank of Nigeria and advising Standard Bank on its $5.5bn sale of a 20%

strategic stake to ICBC. Mr. Southwell has invested capital through auctions for Sydney toll roads and

airport, rail infrastructure in the UK and port infrastructure in Dubai.

Mr. Anshul Rai, Chief Executive Officer, NIDF

Mr. Rai has over nineteen years’ experience in emerging markets infrastructure, with focus on principal

investments, project finance and financial advisory. He has financed and invested in numerous projects

across power, energy, utilities and transport sectors – with investment value of nearly US$50 billion.

Prior to joining Chapel Hill Denham Management Limited, Mr Rai worked at IFCI Limited (India), KPMG’s

infrastructure Group, Veolia Water (South Asia) and Bank Muscat’s Infrastructure Group. The NIDF’s CEO

also managed the MENA Infrastructure Fund, where he originated and executed a large number of

investments and managed the fund’s portfolio of US$200 million.

Some of the transactions that Anshul has been closely associated with include Qurrayah power project

in Saudi Arabia (USD2.8 billion), Morupule power project in Botswana (USD1.5 billion), Barka-2 power &

water project in Oman (USD700 million), Delhi power sector privatization project (USD500 million), coal

and gas fired IPPs in India aggregating 3,000MW (USD3 billion), Alexandria container terminal project

in Egypt (USD300 million), Salalah port expansion project in Oman (USD450 million), Dhamra port

financing in India (USD250 million), Hazira port financing in India (USD300 million), Disi-Amman water

transmission project in Jordan (USD700 million) and multiple water, wastewater and municipal waste

management supply projects across Africa, Middle East and Asia (over USD500 million).

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Investment Decision Making Process

The investment process for the NIDF is broadly divided into three key categories; initial reviews,

conditional investment committee approvals and final investment committee approvals.

Preliminary reviews

The first stage of the investment process for the NIDF entails sourcing viable deals or projects. The fund’s

investment team reviews each project’s fit within the pre-determined investment criteria and risk appetite.

The originating investment team member is required to present the commercial review of the prospective

investment or project to the Investment Committee (IC) and other team members. This review is considered

alongside an internal risk assessment defined by various criteria including:

• Project contractual structure and counterparties

• Revenue and operational risk

• Debt structure and financing terms

• Completion risk

Conditional and Final Investment Committee Approvals

Upon the completion of the preliminary analysis and reviews, the investment team seeks a conditional IC

approval to commence detailed commercial negotiations and project/investment due diligence. The due

diligence is carried out with the support of external consultants - which we believe are of reputable

standing – and covers the following areas:

• Industry assessment

• Management

• Financial

• Technical

• Legal and taxes

• Health, safety, environmental and governance assessment.

Once favourable commercial terms have been reached and the due diligence completed, the team prepares

an investment thesis to be presented to the IC for final approval. The findings of the due diligence and

agreed commercial terms are included in a final investment memorandum and shared with the Trustees

for drawdown.

In our opinion, the investment decision-making process and project execution for the NIDF is robust,

supported by multi-layered and well-defined review processes.

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Figure 5: Investment Process for Nigeria Infrastructure Debt Fund (NIDF)

Initial reviews

• Check project fit with the investment criteria

• High-level commercial review of the investment

opportunity

• Identification of key risk considerations

Conditional investment committee approval

• Desktop review of project information including

financial forecasts

• Approach to the mitigation of identified risks

• Negotiation of ‘term sheet’ with the borrower including

pricing

• Investment committee review and approval of term

sheet and due diligence budget

Final investment committee approval

• Detailed due diligence

• Finalisation of detailed investment terms and drafting of

transaction documentation

• Final investment committee review and decision

• Execution of transaction documentation by the Trustee


Deal sourcing

Preliminary

reviews

Conditional investment

committee approval

Final investment committee

approval and drawdown

N N N

Y

Y Y

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TRADE EXECUTION

People

Chapel Hill’s trade execution is handled by the Investment Management team with support from the

Group’s Finance & Operations, Risk Management & Compliance and the Information Technology (IT) units

as well as brokers, dealers and custodians.

The Finance & Operations team consists of four individuals, led by the Group’s Chief Financial Officer who

has over two decades of finance experience. The Risk Management and Compliance unit has a total of four

employees and is led by a Chief Risk Officer who has over 19 years of experience across reputable financial

institutions including JPMorgan Chase & Co. The technology team consists of three key personnel, with

occasional support from external consultants. The unit is led by a seasoned IT professional with about

fifteen years’ of experience in technology services. There were no significant changes to the composition

of the aforementioned units during the review period.

Following the addition of Stanbic IBTC Securities Limited last year, the Manager utilises a total of three

brokers for equity trades and UBA Global Investor Services for fixed income transactions. The Manager’s

defined criteria for selecting brokers includes best execution on past transactions and affordable

transaction costs. Chapel Hill Denham Management Limited also participates in the primary and secondary

fixed income markets through Primary Dealer and Market Maker (“PDMM”), bookrunners and other

counterparties. For the NIDF, the Trustees execute the final investmnet memorandum and the subsequent

drawdown.

Systems

Equity trades executed via Chapel Hill Securities Limited are routed to the broker via CHDM’s Miles

software (‘core application’ or ‘Milesoft’) while other equity and fixed income trades are executed through

external parties and communicated via emails. The Manager completed the migration from GALENO to

Milesoft in Q1 2019. The new application provides core front and back office functions including portfolio

construction, rebalancing and valuation. CHDM expects a significant improvement in trade processing and

risk controls following the software upgrade.

Processes

Trade requests are typically presented on order forms for approval by either the Managing Director or the

lead portfolio manager. All order forms are subject to risk management and compliance validations, prior

to execution. The operations team also ensures that trade mandates have been duly signed by authorised

signatories before each request is passed on to the appointed broker or dealer. Upon execution, the

dealer/counterparty/broker provides the Investment Management team with a trade confirmation, which

is also shared with the Finance and Operations team. The operations team generates a deal ticket upon

receipt of the trade confirmation and settle the trade in the funds’ or clients’ portfolios as well as with the

custodians.

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Figure 6: Trade Execution Process (Private Wealth and Mutual Funds)

Agusto & Co. believes that the operational framework for trade execution is satisfactory. In our view, the

Manager’s dealers and brokers are reputable and well-experienced.

ANALYSTS’ COMMENTS – RISK MANAGEMENT

INVESTMENT RISK MANAGEMENT

Investment risk management is the collective responsibility of the Investment Management team, Risk

Management and Compliance unit and the investment committees.

Private Wealth and Mutual Funds

CHDM’s Risk Management and Compliance team monitor investments via the Manager’s core application

(Milesoft) by reviewing trade requests vis-à-vis defined regulatory and internal risks limits, the clients’

mandates as well as the IC’s approval. The application is also expected to provide pre-trade checks and

portfolio simulations, which allows a review of proposed trades in line with defined risk limits.

All investments are expected to be held in high quality assets as determined by an internal credit model

(with financial and non-financial metrics) and external credit ratings. Market risk is also managed through

timely reviews of exposures whilst ensuring that a substantial volume of equity investments is held in

large-cap stocks (regarded as highly liquid and less volatile) and defined amounts are kept in cash balances

or liquid FI securities. The Manager also ensures that concentration risk is managed by maintaining

counterparty investment limits for a single stock or counterparty. In our view, the systems and processes

for investment risk management of mutual funds and the private wealth portfolio are adequate.

Investment Team Order Form Custodian

Finance

Operations

Dealer/Broker Approver

Update

portfolio/fund Upon receipt of IC approvals

Risk management and compliance

validation

Deal ticket

Deal ticket Trade confirmation

Bank Account Bank balances

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Nigeria Infrastructure Debt Fund

The NIDF’s exposure to credit risk is managed through an internal credit appraisal model with over 70

metrics2 and ensuring adherence to the relevant debt covenants in the transaction agreement. The debt

covenants require dedicated escrow accounts (funded with net revenues from the projects), which give

priority to debt servicing costs and capital expenditure required to support the project. The debt covenant

also requires a debt service reserve account (DSRA) to be maintained and funded with six months’ worth

of debt servicing expenses, which could support the NIDF’s obligations either when the escrow account is

insufficient or the obligor’s cash flows are inadequate. Other investment risk mitigants as indicated in the

transaction agreement include defined debt to equity ratio of 3:1 and project-wide insurance. After

disbursement/drawdown, the Manager monitors fund utilisation via reviews of the obligor’s financial

condition on a quarterly and annual basis as well as management meetings & presentations.

Investment risk management of the NIDF is also supported by the fund’s supervisory structure, which

includes an Advisory board, a Custodian and two Trustees. The Trustees are represented on the Advisory

Board and ensure that the interest of investors is upheld in every decision taken by the Manager. The

custodian takes possession of the funds after issuance and ensures that disbursements are for purposes

approved by the IC and are consistent with the trust deed. The NIDF is audited annually, while valuations

are performed every quarter.

Overall, we believe Chapel Hill Denham Management Limited’s investment risk management framework is

adequate.

OPERATIONAL RISK MANAGEMENT

Operational risk management is the joint responsibility of the following units; Risk Management &

Compliance, Information Technology (IT) and Finance & Operations.

The Operations team manages the client onboarding process and ensures complete records including

investment policy statements and KYC documentation. The team also provides a layer of control by

ensuring that all trade transactions are duly approved before execution. All operational activities are

subject to reviews by the Risk Management & Compliance unit, which has three core functions; risk

management, regulatory compliance and internal audit & control. The risk officer carries out risk and

control self-assessments, verifying that current practices fit the Manager’s risk appetite. The compliance

officer supervises adherence to the provisions of various laws & applicable regulations and also ensures

that regulatory returns are made promptly. The Internal Audit and Control unit perform daily

callovers/reconciliations and periodic spot checks using Milesoft. The risk and compliance officers provide

weekly and monthly to CHDM’s management while the Board is provided with quarterly internal audit &

control reports.

Operational risk management is guided by a number of policies and manuals including an escalation,

operational risk management and AML/CFT3 policy. Although access to a whistleblowing platform is

available internally, there are no avenues for anonymous reporting on the Manager’s external platforms

including the website.

2 The metrics include financial condition (revenue, cash flow, financing structure and completion risk) 3 Anti-Money Laundering (AML)/Combating the Financing of Terrorism (CFT)

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To prevent and recover from potential operational challenges, CHDM runs on two servers offering

redundancy if one fails. The Manager also carries out daily back-ups via cloud storage hosted by Azure and

to offsite archives. During the review period, Chapel Hill Denham Management completed the migration

from GALENO to a new operating software called Miles. The software supports trade entries, with modules

for the authorisation of trade requests – two key features that were inaccessible on the former software.

Agusto & Co. considers Chapel Hill Denham Management Limited’s operational risk controls to be

adequate for the current scale of operations.

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INVESTMENT MANAGER RATING: METHODOLOGY &

DEFINITIONS

An Agusto & Co INVESTMENT MANAGER rating is based largely on qualitative factors. The factors

considered before arriving at a rating for each institution falls under the following criteria:

• Investment Management

o The decision-making process and buy-sell discipline

o The portfolio management, reporting and settlement systems

o The quality of research, and analysis of market information

• Risk Management and controls

o Investment risk management

o Operational risk management, corporate governance and compliance

Rating Methodology

To arrive at a rating, the broad categories of investment management, and risk management are scored in

terms of:

• the calibre of personnel;

• the functionality of the systems; and

• the robustness of the process and quality of output.

The category scores are weighted according to our view of their importance in capturing an investment

manager’s ability to optimise the risk-return profile of investor funds. The final rating is derived from the

weighted score of an Investment Manager.

Categories and Sub-Categories Scored

Investment Manager

Rating

Investment Management

Research

Decision Making

Trade Execution

Risk Management

Investment Risk

Managment

Operational Risk

Management

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RATING DEFINITIONS

AAA (IM)

Investment management company is considered to have EXCELLENT investment and

risk management capabilities

AA (IM)

Investment management company is considered to have VERY GOOD investment and


A (IM)

Investment management company is considered to have GOOD investment and risk

management capabilities

BBB (IM)

Investment management company is considered to have ADEQUATE investment and


B (IM)

Investment management company is considered to have INADEQUATE to POOR

investment and risk management capabilities.

Rating Category Modifiers

A "+" (plus) or "-" (minus) sign may be assigned to ratings from ‘Aa’ to ‘C’ to reflect comparative position within the rating category. Therefore,

a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating with the -

(minus) sign.

www.agusto.com

© Agusto&Co.

UBA House (5th Floor)

57 Marina Lagos

Nigeria.

P.O Box 56136 Ikoyi

+234 (1) 2707222-4

+234 (1) 2713808

Fax: 234 (1) 2643576

Email: [email protected]

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