Pensions are big in Africa — surprisingly so. Sub Saharan pension funds comprise about $380 billion in total assets. To put that number on a scale, consider that it bests South Africa’s Gross Domestic Product (GDP) by about $30 billion, making it the third largest economy in Africa after Nigeria!
However, while private equity is a stalwart of pension investors around the world, very little African pension capital goes towards private equity.
“There is approximately $29 billion of pension capital [in Africa] that could be invested into private equity,” Nonnie Wanjihia, executive director of the East Africa Venture Capital Association, told AFKInsider.
“Regulatory reforms are taking place across the continent as asset managers are being encouraged to diversify their investments,” she added.
In Kenya, private equity is part of an “other” category that is allowed to comprise 10 percent of pension assets; before last year, when Ascent Capital attracted a $4 million investment from Kenyan pensions, the most recent investment into the asset class took place in the 1990s.
In Nigeria, less than 0.25 percent of total pension assets are in private equity.
By way of comparison, private equity enjoys an average target allocation of 8.3 percent in American pensions.
“Our view is that a limited understanding of the workings of private equity — and of its notable benefits — are at the heart of this tepid investor response,” Erika wan der Merwe, chief executive officer of the Southern African Private Equity and Venture Capital Association, told AFKInsider.
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She’s referring to a regulatory change in South Africa that allows pensions to allocate up to 10 percent of their portfolios to private equity, from 2.5 percent previously.
“In the South African market,” she says, “A handful of pension funds are very comfortable with private equity.” Otherwise, “the take-up of this regulatory allowance has been disappointing.”
In other words, there is a huge amount of marketing to do and a lot of opportunity.
“The argument for private equity for African pension funds is an issue of diversification,” David Ashiagbor, financial sector advisor at Making Finance Work for Africa and co-author of what could be considered the seminal research study on the subject, told AFKInsider.com.
“It’s diversification in terms of asset class, it’s diversification in terms of sector, and it’s diversification in terms of geography.” Ashiagbor notes that the bulk of pension money currently sits in government bonds; alongside allocations to listed equities, it’s an investment strategy that works — at least when it comes to returns, which are typically quite competitive given the relatively high rates of returns for African sovereign bonds.
However, listed markets in Africa aren’t always very representative of economic activity as a whole. By way of example, says Ashiagbor, “If you look at the weight of finance in the economy it’s generally under 10 percent, but in some countries like Nigeria, close to half the investible equities on the stock exchange are from the financial sector, according to RisCura’s Bright Africa report.”
On the whole, then, opening investment to private equity provides pensions with exposure to some of the major growth engines of their respective economies.
According to the MFW4A report, written in collaboration with the Emerging Markets Private Equity Association and the Commonwealth Secretariat, regulatory pressures have “long been seen as the main stumbling block to African pension funds’ investment in private equity.”
Even where regulation expands the ability of pensions to invest in the asset class, it isn’t necessarily easier from a practical standpoint.
Nigeria, for example, now allows 5 percent of pension assets to go to private equity, but allowed funds must also have a minimum of 75 percent of fund assets invested in Nigeria, register with the Nigerian Securities and Exchange Commission, and have a minimum 3 percent general partner investment.
As you can imagine, the list of allowed funds is probably not all that long.
One might complain, but “frankly, it’s not the regulators’ job to promote private equity, or indeed any other asset class,” Ashiagbor cautions. “In any other jurisdiction you work with the regulations you are given, whilst engaging/advocating for change.”
He points out that private equity firms can do more to make the asset class accessible to the pension fund world. “People need to start having serious discussions and thinking outside of the box and coming up with structures that will actually work” for African pension fund investors.
That means that private equity firms can and should spend more time specifically targeting African pensions by providing more comprehensive introductions to the asset class and fund structures that will comply with local rules.
Firms would also be wise to take account of the opportunity among smaller pensions. “If you look at South Africa, for example,” says Ashiagbor, “Everyone talks about [the Government Employees Pension Fund, GEPF], but South Africa has over 3,000 pension funds.” In other words, while the massive GEPF commands some 90 percent of the country’s pension assets, there are numerous smaller funds which may be just as willing to allocate funds to private equity strategies.
This is especially the case as pension managers become more familiar with the asset class. “The issue now is, ‘I like the look of it, how can I get in? Can we find a structure that works for the two of us?’”
In the end, Ashiagbor believes that private equity fund managers need to spend time getting to know their new funding base, and designing a solution that works for these investors, rather than offering a preconceived package.
After all, while regulations can be difficult to work with, they are, as Ashiagbor notes, there for a reason.
“Assets under management across the board are growing at around 20 percent per year if you were to do an average across the 10 countries in our report… The way I think about it is, if your disposable income were growing at 20 percent per year at some point you’d start doing silly things.
“Investment regulations do have to be opened up, but it must be done in a way that protects people’s pensions. So that’s the big challenge.”
A challenge, and an immense opportunity for all involved.