March 13th, 2015 by Tom Minney
Do you agree or disagree with this view? Comments are welcome below
Pension funds in 10 African countries already have $379 billion in assets under management – 85% or $322bn of it based in South Africa – and they continue to grow very fast. That means careful thinking about how to nurture Africa’s savings pool while the need to deploy these resources most productively puts the spotlight on the search for quality investment assets.
For example, Ghana’s pension fund industry reached $2.6bn by Dec 2013 after growing 400% from 2008 to 2014. Nigeria’s industry has tripled in the last 5 years to some $25bn in assets by De 2013, and assets under management are growing at 30% a year. There are 6 million contributors, but many more Nigerians still to sign up pensions.
Pensions have a special place in the capital market as they take a longer-term view and can be patient in the hope of greater returns. Some pension funds, in Africa and elsewhere, argue that pensioners are not just looking at the value of their retirement income but also the quality of their lives, opening the way to carefully chosen investments in infrastructure, healthcare and other benefits which pensioners and their families might enjoy.
What are the African factors driving the growth of pension funds?
• Many countries have set up new regulators and even more are introducing regulations, including forcing more employers to provide pensions. With the new regulatory frameworks come structural changes such as the need for professional third party asset managers
• Changing demographics: The age group over 60 years is the most rapidly increasing, according to some research
• It’s a virtuous circle, many Africans want savings opportunities. If pension funds produce results, and are well run and good at communicating, people will respond.
The growth is only beginning. So far only 5%-10% of the population in sub-Saharan Africa are thought to be covered by pension funds and 80% in North Africa. Pension funds are still tiny in comparison to gross domestic product (GDP), which in turn is growing fast in many African countries – for example pension funds are about 5% of GDP in Nigeria, compared to 170% of GDP in Netherlands, 131% in UK and 113% in America.
Southern Africa is generally better served: Namibia has some $10bn in pension assets representing 80% of GDP and Botswana $6bn or 42% of GDP. The biggest pension schemes are usually government and social-security funds as well as local government and parastatal funds (such as Eskom in South Africa), as well as those of big corporations and multinationals.
Economist Charles Robertson of Renaissance Capital says conservatively that pension funds in the 6 largest sub-Saharan African markets will grow to $622bn in assets by 2020 and to $7.3 trillion by 2050.
What to invest in?
The challenge is how to invest the capital productively. Are Africa’s entrepreneurs, corporate finance and investment banking houses and capital markets rising to the challenge of bringing a a strong pipeline of investment-ready projects to keep up demand for capital?
Capital markets need to offer liquidity and transparency both to channel the foreign capital looking for African growth opportunities for their portfolios and now for domestic funds too. Liquidity can be a key problem, even in Africa’s world-beating Johannesburg Stock Exchange, where the Government Employees Pension Fund (GEPF) is thought to account for 13% of market capitalization and to be the country’s biggest investor in commercial property.
Big funds in small other Southern African capital market swamps can be like hungry hippos, snapping up promising new investments as they surface. Even if they feel satisfied from a good run of success on some of these investments, they can hardly disgorge them back into the liquidity pool for other traders because of the gnawing fear they would not find other local investments to fill their bulging portfolios.
Others share the worry. Eyamba Nzekwu of Nigeria’s Pencom was reported as saying: “Savings are growing much faster than products are being brought to the market to absorb these funds”. Pension fund growth is thought to have contributed to a 79% surge in Ghana stock market in 2013 as funds chased too few investments.
Regulators should encourage the fund-managers to upgrade skills fast to be more proactive in picking and trading stocks and African fixed income. They should also widen the space in the interests of helping the markets and the funds to grow through liquidity. This means, for instance instance, urgently relooking restrictions on cross-border investments, including into other African markets.
Private equity and infrastructure
The pension funds provide a huge opportunity for alternative assets, especially private equity. According to research by the African Development Bank’s Making Finance Work for Africa and the Commonwealth Secretariat, African pension funds are estimated to have invested some $3.8bn-$5.7bn in private equity and to have scope to invest another $29bn (see table below). Many countries are passing new regulations to allow investment into private equity and other unlisted investments. Funds have been experimenting – sometimes disastrously – with small and medium enterprise and other developmental investments.
International private equity fund managers such as Helios and LeapFrog have also seen the future, making investment in pension fund providers – Helios took equity in Nigeria’s ARM Pension Fund Managers and LeapFrog into Ghana’s Petra Trust.
Africa has huge need for infrastructure finance and pension funds could be the ideal pool of patient capital but more work needs to be done to increase the supply of investable projects and to increase capacity of pension funds to invest in projects directly or through infrastructure fund managers.
Savings are good for growth, provided there are productive assets for them to go into. Africa’s savings are rising, often driven by regulation, and international interest has been strong for years. Can Africa’s entrepreneurs, their advisors, private equity funds and the capital markets institutions rise to the challenge of building a big enough pipeline of great investment opportunities suited to the needs of these investors?
For more reading:
This article is heavily based on work by: Ashiagbor, David, Nadiya Satyamurthy, Mike Casey and Joevas Asare (2014). “Pension Funds and Private Equity: Unlocking Africa’s Potential”. Making Finance Work for Africa, Emerging Markets Private Equity Association. London. Commonwealth Secretariat. Available through MFW4A.
Another book is by Robertson, Charles (2012). “The Fastest Billion: The Story Behind Africa’s Economic Revolution”. Renaissance Capital. Read more here or buy it on Amazon (link brings revenue to this site).
Other articles are at The Economist on Nigeria’s pensions, African Business and Wall Street Journal.
March 4th, 2013 by Tom Minney
The International Organization of Securities Commissions (www.iosco.org) published today (4 March) a report on liquidity risk management for collective investment schemes (CIS). This aims to make sure in particular that open-ended funds (where people can sell their units back to the fund when they want their money back) can meet their obligations for redemptions and other liabilities.
Liquidity has been a major preoccupation for regulators in many financial industries since the outbreak of the global financial crisis. But discussions have mostly focused on liquidity in banking.
Today’s report is Principles of Liquidity Risk Management for Collective Investment Schemes and contains principles against which both the industry and regulators can assess the quality of regulation and industry practices. Good liquidity risk management is key in correct operation of a CIS.
The principles are structured according to the time frame of a CIS’s life: first principles to be considered in the design (pre-launch) phase of a CIS; then principles that should form part of the day-to-day liquidity risk management process. When industry is implementing the principles, they will have to rewrite (“transpose”) them while taking into account the local regulatory framework
IOSCO had previously published (Jan 2012) a report on Principles on Suspensions of Redemptions in Collective Investment Schemes which covers exceptional circumstances where a liquidity problem may lead a CIS to temporarily suspend all investor redemptions.
IOSCO is the leading international policy forum for securities regulators and is the global standard setter for securities regulation. The organization’s membership regulates more than 95% of the world’s securities markets in 115 jurisdictions and it continues to expand. Its Board is the governing and standard-setting body and is made up of 32 securities regulators and chaired by Masamichi Kono, Vice Commissioner for International Affairs at the Financial Services Agency of Japan (JFSA). Members are the securities regulatory authorities of Argentina, Australia, Belgium, Brazil, Chile, China, France, Germany, Hong Kong, India, Italy, Japan, Korea, Malaysia, Mexico, Morocco, the Netherlands, Nigeria, Ontario, Pakistan, Portugal, Quebec, Romania, Singapore, South Africa, Spain, Switzerland, Trinidad and Tobago, Turkey, United Kingdom and the United States.
October 28th, 2011 by Tom Minney
The UK’s regulator, the Financial Services Authority (FSA), has issued a warning on its website about unregulated “sustainable, ethical and alternative” investments. It says: “We are seeing an increasing number of overseas schemes that offer investment opportunities in tree and crop plots abroad, and other ethical investments.
“These schemes may be promoted by an operator ‘cold calling’ with an offer for you to buy a plot on a plantation which harvests agricultural commodities such as teak trees, jatropha, paulownia and biofuels. The investment is usually stated to be low risk but promising high, often guaranteed returns of around 15-25%. The investment period is typically about five years, after which your plot will be harvested and sold on your behalf and the profits forwarded to you.”
They note that some of the schemes being offered to UK investors are structured so they do not meet requirements and therefore then do not have to be registered. However, UK investors should know that the schemes are not covered and they will not be protected by complaints procedures or compensation if things go wrong.
According to the FSA: “We have heard reports of promoters using aggressive, high-pressure sales tactics, and often claiming we do not need to authorise the schemes, as they are not collective investment schemes (CIS). While we regulate CIS, we do not regulate the sale of land, trees or crops.”
The FSA (www.fsa.gov.uk) has been investigating and says that some tree and crop schemes seem to be structured to avoid CIS rules. In simplistic terms, a CIS would be involved if the investors do not have day-to-day control over managing their plot, where investors’ funds are pooled or where the operator is responsible for managing the scheme as a whole.
The regulator wonders how investors do have day-to-day control over business performance, when the plot is thousands of miles away. According to the FSA “We are continuing to look into several schemes to establish whether they are CIS, but we suggest investors treat such opportunities with caution.” It advises that if you think a scheme is suitable for you and you are aware that you may not be protected, you should consult an independent financial adviser or lawyer. It also offers a consumer helpline.
The FSA issued an earlier warning in July 2010 about the rise of unregulated CIS and says: “sustainable, ethical and alternative investment opportunities are increasingly being offered to investors without the protection of UK complaints procedures or compensation schemes if things go wrong.”
COMMENT: This blog supports sustainable, ethical investment 110% and strongly believes individuals have the right to choose what to do with their money and to follow their beliefs. But they need to be aware of the risks, to understand what they are investing in, and to be aware that social business can sometimes be harder to make succeed.
July 6th, 2011 by Tom Minney
The dynamic Stock Exchange of Mauritius (www.stockexchangeofmauritius.com) is pushing ahead with a wide range of activities aimed at building its role as a secure base for international funding transactions and an African alternative to international listing venues. It is moving to becoming a multi-product exchange aimed at the international market, through rapid development from its origins as an exchange focused only on the domestic market.
According to the website: “In the years to come, the split of listings on SEM is expected to overwhelmingly consist of international funds, international issuers, specialized debt instruments, Africa-focused Exchange-traded funds and other structured products. As SEM also aspires to emerge as a capital-raising platform for Africa-focused investments routed through the Global Business Sector, the SEM platform will growingly (sic) be used to channel investment flows from SA/Europe/Asia into Africa and from USA/Europe into Asia.” Mauritius combines good regulation with flexibility and has been a key base for funds including private equity funds investing into Africa and into India.
The bourse is aiming for a wide range and growing numbers of issuers, players and investors, increasing the breadth and depth of the Mauritius market and integrating the Mauritius financial services sector within the international financial system.
It made major changes to the Listing Rules (early 2010) to align them with the government’s Collective Investment Schemes Regulations 2008, positioning SEM as an attractive venue for listing Global and Specialised Funds, in line with the strategic shifts. The Listing Rules are more flexible to reflect the specific attributes and characteristics of the specialised funds to be listed. SEM aims to be platform of choice for listing a wide variety of funds such as Specialised Collective Investment Schemes, Professional Collective Schemes Export Funds, Global Schemes as part of diversifying product offerings and emerging as an international exchange. The management also commits to aggressive timing in processing listing applications and a competitive listing fee structure. In May 2011, SEM introduced Chapter 18 in the SEM’s Listing Rules, to cater for the listing of specialist companies and specialist debt instruments, targeted at qualified investors.
It is one of the African leaders in multi-currency trading and (since 2010) can trade and settle equity and debt products in Euro and GBP. From June 2011 it was the first exchange in Africa to list, trade and settle equity products in USD.
It supplies real time data through top global vendors such as Thompson Reuters, Financial Times and Bloomberg (since early 2010). The data coverage by global vendors is a powerful marketing medium to enhance SEM’s visibility internationally and put the exchange on the radar screen of a wider spectrum of international investors, thus attracting more foreign investor interest on our market. Mauritius is one of the few African exchanges to be connected to Bloomberg and Thompson Reuters real-time. Growing interest from international investors has prompted index and data providers including Standard & Poors, Morgan Stanley, Dow Jones and FTSE to include SEM in new indexes recently launched to track the evolution of key frontier emerging markets.
Over the last 10 years, the Mauritius Bourse has attracted strong foreign investor interest, generating positive investment inflows into many listed companies. 2010 was a record year for net foreign investment inflows. “For 2011, we are already stepping up our efforts via international conferences and roadshows, to place the SEM on the radar screen of institutional investors who are keen on frontier emerging markets that are well regulated and adhere to international best practice”, says the website.
SEM also has ambitions to contribute more broadly to the development of the Mauritian economy and to help grow capital market activities nationally and throughout Africa.
Highlights of recent history
SEM became a full member of the World Federation of Exchanges (WFE – www.world-exchanges.org) in November 2005. This is a high standard and shows that SEM is in the top rank in terms of stringent standards and market principles required to be accepted to this status by the WFE, which sets the standards for registered securities markets worldwide. The standards are recognized by industry, regulators and supervisorss. The WFE membership helps ensure that foreign investors play a growing role – “in a typical year, foreign investments represent 25–35% of trading activities on our market” according to the website.
The Development & Enterprise Market (DEM) was set up in 2006 This is the market for small and medium-sized enterprises (SME’s) and newly set-up companies with sound business plans and showing growth potential. Companies can use the advantages and facilities of an organised and regulated market to raise capital for growth, to improve liquidity in their shares, to obtain an objective market valuation and to enhance their corporate image.
Since March 2010, the SEM was designated by the Cayman Islands Monetary Authority (CIMA) as an “Approved Stock Exchange” by virtue of its membership of the WFE for the purposes of CIMA’s Mutual Funds Law, Banks and Trust Companies Law, Insurance Law, Companies Management Law and Securities Investment Business Law. This raises SEM’s profile as a well-structured and properly regulated exchange and enhances SEM’s position as an attractive listing venue for global and specialised funds.
From 31 January 2011, SEM has been designated by the United Kingdom tax authorities, Her Majesty’s Revenue and Customs (HMRC), as a “recognised Stock Exchange” under section 1005 (1) (b) Income Tax Act 2007. This means that securities admitted to trading and listed on the Official Market of the SEM will meet the HMRC interpretation of “listed” as set out in section 1005 (3) (a) and (3) (b) Income Tax Act 2007 and for Inheritance Tax purposes. This designation confers potential benefits such as permitting UK pension schemes to hold securities listed on the Official Market of SEM, giving companies and funds listed on SEM access to a larger market of sophisticated, well-capitalised investors. The designation reinforces SEM’s attractiveness as a listing venue for global funds and specialized products. Securities listed on the Official Market of the SEM may be held in tax advantaged Individual Savings Accounts (ISAs) and Personal Equity Plans (PEPs) by UK investors. Holders of debt securities satisfying the Eurobond exemption and listed on the Official Market of the SEM are exempted from withholding tax on distributions underlying these debt securities. Inheritance tax advantages may accrue to UK holders of securities listed on the Official Market of the SEM.