Data & Intelligence

Pension Funds and Private Equity: Unlocking Africa’s Potential

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Recent reforms across Africa have created private pension systems that are rapidly accumulating assets under management (AUM) in line with the continent’s explosive demographics. A number of dynamics currently underway on the continent – expanding populations, increasing urbanisation, rising per capita incomes, and a growing and consuming middle class – are all contributing to a pension fund industry that urgently needs to diversify its investment portfolios. The recent growth in the African pensions industry has created opportunities to fund the long-term investment in infrastructure and other sectors that the continent so desperately needs.

This is especially true given the current context of dwindling overseas development assistance budgets that have traditionally funded such investments. The growth in assets, which must be carefully managed, also brings supervisory and regulatory challenges. One of the key challenges is how to encourage the portfolio diversification necessary for these systems to manage risk, whilst ensuring that diversification in itself does not become a source of risk as pension funds venture into hitherto unknown asset classes and markets.

With the region’s underdeveloped capital markets and lack of long-term finance, private equity provides an attractive solution for African companies in search of growth capital. This is supported by data from the Emerging Markets Private Equity Association (EMPEA), which show private equity investment in Africa (including North Africa) rising from US$1.5 billion in 2012 to US$1.8 billion in 2013. Private equity interest in Sub-Saharan Africa, in particular, is at an all-time high. According to the EMPEA 2013 annual survey of global institutional investors, for the first time the region ranked as the most attractive emerging market for GP investment.

Investors across the globe are clamouring to learn more about these markets and growing numbers of global fund managers are hopping on flights to Nairobi, Accra, Lagos, and other key cities to check out the region’s investment opportunities. However, much of this interest has not yet translated into capital commitments – ‘LPs are bringing their notebooks, not their cheque books,’ is an observation frequently heard on the continent. With more than US$7 billion raised in the five years from 2009-2014 – much of which was spurred by the development finance institutions (DFIs) that continue to support both first-time and established GPs – Sub-Saharan Africa represents on average roughly 4 per cent of the total private equity amounts flowing to emerging markets during this period.

With increased foreign interest in African private equity, and the exponential growth in pension assets on the continent, it is no surprise that local capital (or the lack thereof) has become a hot topic for the industry. What will it take to unlock the significant amounts of capital available for private equity from Africa’s pensions industry?

EMPEA has served as a useful reference platform for CDPQ by helping to define the eligible universe of fund managers in growth markets. Membership provides background data and a...

Rashad Kaldany | Executive Vice-President and Growth Markets, CDPQ

The developed markets have no equivalent to the role EMPEA is playing as a convener and source of trusted information in the emerging markets.

David Rubenstein | Co-Founder and Managing Director, The Carlyle Group