Pension Funds and Private Equity: Unlocking Africa’s Potential
Posted On: 30 Jul 2014
Africa’s Pension Funds and Private Equity Are Uniquely Aligned to Unlock Continent’s Potential
- New report profiles pension fund industries of 10 African countries: Botswana, Ghana, Kenya, Namibia, Nigeria, Rwanda, South Africa, Tanzania, Uganda and Zambia.
- African pension funds currently represent a growing domestic source of capital for private equity estimated at over US$29 billion.
- Private equity offers pension funds a long-term investment opportunity with diversification and the potential to outperform.
- Analysis of emerging and developed markets with pension fund reform show growth in domestic private equity industries; recent reforms in some of Africa’s key markets are beginning to make it possible for local institutional investors to participate in private equity.
30 July 2014, London – African pension funds can play a critical role in the region’s private equity industry mobilizing an estimated US$29 billion and driving economic development according to research conducted by the Commonwealth, the Making Finance Work for Africa Partnership Secretariat (“MFW4A”) and EMPEA, and kindly supported by The Abraaj Group. This joint report provides information that is crucial to a better understanding and appreciation of the pensions industry in Africa. In addition to outlining the latest data and regulatory profiles for 10 African countries, the report estimates how much capital could be available to support private equity in these countries as well as how much has already been mobilized to date.
The Growth of the African Pension Industry
Global interest in the African pension industry is increasing as recent regulatory reforms in many countries have created private pension systems pooling domestic resources that can be mobilized for long-term investments. Ghana’s industry, for example, is expected to expand by upwards of 400 per cent in the next four years. Pension assets now equate to some 80 per cent of GDP in Namibia and 40 per cent in Botswana.
In light of rapidly accumulating assets, pension funds across Africa are seeking investment opportunities to meet their long-term liabilities. Private equity offers these pension funds and their contributors an opportunity to access the growth being generated by unlisted companies across the continent, and with it an outperformance potential that is uncorrelated to other asset classes, as well as the chance to contribute capital to spur private sector development in their respective countries.
Samantha Attridge, Head of Finance and Development Policy at the Commonwealth, notes, “Despite the rapid rise of pension funds in many African markets, little has been done previously to study the pension fund industry and promote the exchange of knowledge across the continent and globally. African pension funds offer an enormous promise as a continental source of investment capital. This report marks an important first step for the development of local capital sources in Africa and serves as a foundation for dialogue to continue.”
According to Stefan Nalletamby, Partnership Co-ordinator, MFW4A, “The growth of African pension fund industries opens up a substantial opportunity for financial sector development on the continent and overall economic development. These domestic resources can fuel investment in local businesses, infrastructure projects and services desperately needed for Africa’s continued transformation and growth.” His colleague David Ashiagbor adds, “Regulation has long been seen as the main stumbling block to African pension funds’ investment in private equity and similar asset classes; however, the reforms we are seeing across the continent offer hope for change.”
The Alignment of Domestic Pension Funds and Local Private Equity Industries
Private equity is helping pension funds globally bridge the gap between targeted returns needed to meet long-term liabilities and actual median returns. As developed market pension funds look to emerging markets for the prospect of higher returns to achieve their fiduciary goals, African pension funds can serve as a positive indicator to international investors of a local fund manager’s credibility as well as the country-specific prospects of a certain sector.
According to Sev Vettivetpillai, Partner at The Abraaj Group, “Local capital participation in Africa is critical to further developing the private sector on the continent. By providing a strong signal to the global investment community that opportunities are real, and risks have been adequately assessed, investment by local pensions in private equity catalyzes additional external investment into Africa. As private equity’s transformative impact has become clear, it is imperative that local institutions invest and contribute to their country’s economic transformation. And as fund managers, we must do our part to provide the tools and resources necessary to inform Africa’s pension funds about private equity to ultimately increase the pool of capital available to the whole continent.”
The growing pension fund industry opens up a domestic supply of capital for the development of Africa’s private equity industry. Evidence from Latin America reveals that local sources were a significant driver of private equity’s rise in the region, where funds have raised over US$31 billion in the past six years for investments in Latin America-based companies, according to EMPEA. While private equity benefits from the additional capital resources that domestic pension funds provide, the local community, including the pensioners themselves, benefit from private equity actively investing in and creating value for domestic businesses, which can lead to job creation and economic growth.
Nadiya Satyamurthy, Senior Director at EMPEA, remarks, “Private equity is uniquely well-aligned with the African pension fund industry. It offers long-term investment opportunities with uncorrelated returns as well as the ability for domestic pensioners to fuel their continent’s economic growth through private equity. The asset class is unlike any other because its active investment style can create sustainable economic growth through operational improvements, governance enhancements and environmentally-friendly renovations in local businesses.”
About the Report – Pension Funds and Private Equity: Unlocking Africa’s Potential
This joint publication provides information that is crucial to a better understanding and appreciation of the pensions industry in Africa, with a focus on Botswana, Ghana, Kenya, Namibia, Nigeria, Rwanda, South Africa, Tanzania, Uganda and Zambia. Providing expert insights from practitioners in the industry, this comparative analysis aims to advance the dialogue on private equity among African pension fund managers, pensioners, regulators and other industry stakeholders and further the exchange of best practices across the region and with other emerging and developed markets. The Commonwealth, MFW4A and EMPEA chose to focus on private equity as it can be an attractive option for African companies in search of capital and can be a catalyst for job creation and economic growth, particularly in the context of underdeveloped capital markets where there is a lack of long-term financing.
About The Commonwealth
The Commonwealth is a voluntary association of 53 independent countries. It is home to 2.2 billion citizens. The Commonwealth includes some of the world’s largest, smallest, richest and poorest countries, spanning five regions.
This report represents a culmination of work the Commonwealth has undertaken over several years to assist member countries mobilise resources for investment by fostering the development of the African pension fund and private equity industries. The Commonwealth Private Investment Initiative (CPII), which raised more than US$400 million for investment in Africa between 1997 and 2007, pioneered private equity in Africa, demonstrating that frontier markets could offer attractive returns to private investors. www.thecommonwealth.org
About Making Finance Work for Africa
The Making Finance Work for Africa (MFW4A) partnership is dedicated to supporting the efforts of African countries to strengthen their financial sector by co-ordinating and facilitating financial sector development initiatives, promoting closer collaboration among development partners and fostering exchanges among African stakeholders. Twelve founding multilateral and bilateral development partners support the Partnership with a shared common vision to overcome fragmentation, and increase efficiency and effectiveness to develop Africa’s financial sectors. www.mfw4a.org
EMPEA is the global industry association for private capital in emerging markets. We have over 300 member firms, comprising institutional investors, fund managers and industry advisors, who together manage more than US$1 trillion of assets. Our members share EMPEA’s belief that private capital is a highly suited investment strategy in emerging markets, delivering attractive long-term investment returns and promoting the sustainable growth of companies and economies. www.EMPEA.org
About The Abraaj Group
The Abraaj Group is a leading private equity investor, purpose-built for operating in the growth markets of Africa, Latin America, the Middle East, South Asia, South East Asia, Turkey, and Central Asia. Employing over 300 people, Abraaj has over 25 offices spread across six regions with hubs in Istanbul, Mexico City, Dubai, Mumbai, Nairobi, and Singapore. The Group currently manages US$7.5 billion across more than 20 sector and country-specific funds, encompassing private equity and real estate investments. www.abraaj.com