The increasing interest among pension fund managers in Africa towards private equity investments could hold the key to enhancing the level of capital available for local entrepreneurs.
In a study on pension funds based in ten African countries, it is estimated that there are at least $380 billion in pension fund assets under management. Of this amount, $29 billion could be dedicated to private equity investments, which is three times larger than the overall amount of capital raised for the continent since 2009.
Yet current regulations inhibit the amount currently dedicated to alternative assets such as private equity and infrastructure. The default investment is typically domestic Treasury bills and government bonds.
Regulatory reform encouraging pension fund managers to directly acquire stakes in African companies or to invest in private equity funds as limited partners could allow local companies to gain a new source of financing in currently shallow capital markets.
Private equity also allows businesses to gain strategic assistance to help them grow, resulting in job creation and economic growth. Additionally, the development of local sources of capital could attract foreign investment and lend credibility to the “African growth story.”
Due to recent demographic and regulatory changes, pension funds are becoming increasingly well suited for private equity. Traditionally, people working in agriculture and the informal sectors were excluded from pension funds.
Urban migration has contributed to an increasingly formalized labour force and greater savings into pension systems. A growing middle class has increased the amount contributed to pension funds, and regulations have been introduced to expand mandatory coverage.
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In Nigeria, for example, the pension fund industry rose from $7 billion to $25 billion between 2008 and 2013.
Governments, which previously held a monopoly over pension management, have opened their system tocompetition from private pension funds, which has increased efficiency and professional standards. Additionally, many governments, such as Nigeria’s, are in the process of liberalizing regulations to allow pension funds to invest in private equity.
Private equity fund managers are also increasingly interested in investing in African pension funds due to the growth of the pension fund industry. In 2014, Helios Investment Partners acquired a minority stake in Nigeria’sARM Pension Managers.
South Africa’s Public Investment Corporation (PIC) is a trailblazer in regards to opening its portfolio to private equity. PIC manages 23 public sector bodies, including the Government Employees Pension Fund, Africa’s largest pension fund, and it holds $135 billion in assets.
In 2010, it earmarked 120 billion rand ($11.6 billion) for international investment, of which 60 billion rand ($5.8 billion) was dedicated to the rest of Africa. PIC’s interest in Sub-Saharan Africa is no surprise given that South Africa’s average annual growth of around 2 percent lags behind Sub-Saharan Africa’s 5 percent.
The majority of its Africa allocation is dedicated to private equity because of shallow public equities markets in the region.
PIC has an explicit developmental investment strategy, and investments must be concordant with the objectives of economic growth and job creation, with an emphasis on infrastructure projects.
PIC has already made several large investments outside of South Africa, including a $289 million investment in Nigeria’s Dangote Cement, $275 million in Tanzania’s Tanga Cement and $250 million in Togo-based Ecobank Transnational.
Overall, greater investment into private equity by pension fund managers is likely to stimulate growth. With average returns of 10 to 12 percent over the last 10 years, the performance of Africa-focused private equity funds is on par with Asian and Latin American funds.
Liberalization of national pension fund regulations could unlock a vast pool of local capital to promote the growth of local enterprises.
This Article first appears on Global Risk Insights. It was written by Alexia Jablonski, a policy analyst and private equity researcher on Sub-Saharan Africa.