Archive for the 'Funds' Category

Fund managers seek good governance

Governance, good regulation and availability of market data and prices help African fund managers decide on investing into other African markets, according to a survey of 50 African asset-managers for the African Exchanges Linkage Project (AELP) project. Key factors when they choose new markets are: market regulation (91% of replies), followed by investor regulation and availability of market data and prices (90% each).

Other top criteria that help fund managers choose where to invest are: levels of dealing price, efficiency of execution and commission (86%), the quality of companies and investment opportunities (also 86%), corporate, social and governance criteria (84%) and availability of research (80%). Three quarters of investors said they were reluctant to invest in small and illiquid markets or where valuations are excessive. Only half decide to invest in a company based on its dividend policy, while valuation and governance are the top factors.

Comments from asset managers interviewed for AELP Buy-Side survey

Asset managers in Nigeria and the francophone West African countries are the most optimistic about prospects for Africa’s economies. In the AELP poll, some 97% of the surveyed Nigerian asset managers are optimistic about the continent, with average assets of $364 million under management, followed by 85% of surveyed francophone asset managers, who averaged $416 million of assets managed. Average across all the survey respondents, including a couple of South African managers, was $4.1 billion in assets under management.

Optimism is also strong among asset managers surveyed in Mauritius (80% optimistic), Morocco (73%), Nairobi and Egypt (each with 65% of responses optimistic). Nearly half (46%) of respondents manage assets with investment horizons over five years, another 23% for three to five years.

“The results of this survey confirm the high level of professionalism of African fund managers using world-class standards and criteria in their decision-making. This is really reassuring for the success of the AELP initiative,” says Dr. Edoh Kossi Amenounvé, President of ASEA.

The poll evaluates the appeal of different investment markets in the AELP, which brings together seven leading African securities exchanges to boost trading, investment and information links. AELP is procuring a technology platform to link stockbrokers, so that a broker on one exchange can send investors’ orders to an executing  broker on another exchange for execution.

The AELP is a joint initiative by the African Securities Exchanges Association (ASEA) and the African Development Bank to unlock pan-African investment flows, promote innovations that support diversification for investors, and address depth and liquidity in the markets. It is funded by the Korea-Africa Economic Cooperation (KOAFEC) Trust Fund through the African Development Bank.

The AELP exchanges are: Bourse Régionale des Valeurs Mobilières (BRVM, integrating eight West African countries), Casablanca Stock Exchange, The Egyptian Exchange, Johannesburg Stock Exchange, Nairobi Securities Exchange, The Nigerian Stock Exchange and Stock Exchange of Mauritius.

Cross-border trading between the seven markets totalled $1.1 billion in 2019, and was at over $500 million in the first quarter of 2020, according to the participating markets. The “African Listed Securities” assets across these exchanges offers equities investments in more than 1,050 companies, including Africa’s most promising, profitable companies and global leaders. Investors will also buy or sell bonds, exchange-traded funds (ETFs) and derivatives if they are listed on the participating Exchanges.

ASEA supports African economic integration and the African Continental Free Trade Area. The AELP will promote free movement of capital and investment.

About ASEA

The African Securities Exchanges Association is the premier association of the 25 securities exchanges in Africa who have come together with the aim of developing Member Exchanges and providing a platform for networking. ASEA was established in 1993 and works closely with its members to unlock the potential of the African capital markets.

Vision

To enable African Securities Exchanges to be key significant drivers of the economic and societal transformation of the year 2025.

Mission

To provide a forum for mutual communication, exchange of information, co-operation and technical assistance among its members, to facilitate the process of financial integration within the region for the effective mobilization of capital to accelerate economic development of Africa.

Executive pleads guilty as collapse of $14bn Abraaj hits PE flows into Africa

The ongoing collapse of the giant Abraaj platform in the world’s biggest private-equity insolvency has hit flows into Africa-focused private-equity funds. Former Abraaj managing partner Mustafa Abdel-Wadood is cooperating with New York prosecutors after pleading guilty in a Manhattan court 2 weeks ago. He could face up to 125 years in prison.

Abraaj was founded in 2002 and based in Dubai. It was one of the world’s most influential emerging-market investors and acquired the Aureos private equity funds in 2012 (as reported in this blog) with the support of key Aureos investor CDC. At the time of the collapse Abraaj managed almost $14 billion on its platforms with 30 funds and holdings in health-care, energy, lending and real estate in Africa, Asia, Latin America and Turkey.

Abdel-Wadood, age 49 years and a citizen of Egypt and Malta, was arrested in April in New York while taking his wife and son to look at universities, according to this 28 June report on Bloomberg news. In a prepared statement in a Manhattan Court on 28 June he choked back tears as he said: “I knew at the time that I was participating in conduct that was wrong.. I ended up drifting from who I really am. For that, I am ashamed.” He is under house arrest subject to $10m bond.

He is one of six former Abraaj executives facing racketeering and securities-fraud charges. Founder and chief executive Arif Naqvi, from Pakistan but a UK resident and regular participant at Davos conferences, was arrested in London in April and detained at Wandsworth Prison. In May he was released on conditional bail of £15m ($19m) in May while fighting extradition to the US (see this report in the Financial Times . Other former executives charged were Chief Financial Officer Ashish Dave and managing directors Sivendran Vettivetpillai, Rafique Lakhani and Waqar Siddique.

Anonymous warnings had been sent to potential investors in September 2017, according to a 5 May  Bloomberg report . The email, entitled “Abraaj Fund 6 Warning” stated: “The governance is not what it appears but employees are afraid to speak or partners entrenched so don’t speak,” the email read. “There is no smoke without fire. Be the hero in your firm and uncover the truth by asking simple questions.”

However, Abraaj answered queries to investors’ satisfaction although the $6bn fund eventually did not go ahead.

According to press reviews of the governance lapses that had led to the collapse, expenses at Abraaj had been running higher than income from management and performance fees on the funds leading to multimillion dollar operating losses. The group borrowed, and in the 9 months to March 2018 financing costs came to $41m. It hoped to sell assets to avoid a cash crunch but the deals were repeatedly delayed, according to The Economist.

Money had been moved out of funds to cover losses, according to the US Securities and Exchange Commission (SEC). It says that Naqvi and Abraaj Investment Management Limited (AIML) misappropriating $230m from the Abraaj Growth Markets Health Fund (AGHF), which closed at $1 billion in 2016, between Sept 2016 and June 2018. The funds were supposedly for acquisitions but the SEC says Naqvi commingled the assets with corporate funds of AIML and its parent company, Abraaj Holdings – essentially moving them into the company’s bank accounts.

Four limited partner (LP) investors in the Abraaj Healthcare fund, including Bill & Melinda Gates Foundation and the International Finance Corporation, raised concerns, hired investigators and commissioned an audit. The news broke in February 2018 and Abraaj went for liquidation in the Cayman Islands and the United Arab Emirates in April 2018. It decided to restructure, so AIML was set up to manage the funds in 2018 and Naqvi was moved from being CEO of the funds, according to Private Equity Africa news website, which has been covering this story extensively.

According to the 28 June Bloomberg report Abdel-Wadood described the alleged conspiracy, which related to hiding Abraaj’s poor financial condition and convincing new investors to put up more cash, including lying to U.S.-based investors during meetings in Manhattan in 2016 as they sought to raise $3 billion for a new fund. The money they raised wasn’t spent the way investors were told, he said: “Put simply, money was co-mingled that should have been separated, and investors were not told the truth.”

Liquidators have been seeking other fund managers to take over the funds but in each case a share of LPs must approve the change of manager and Abraaj works with 500 LPs.

At the end of 2018, private equity house Actis was cleared to acquire 16 Abraaj funds covering Africa and Asia, including sub vehicles and legacy funds taken over from Aureos, and according to The Economist talks continue on the African funds, while Franklin Templeton is talking about taking over the Turkish fund. In May, US-based TPG said it would become custodian for the healthcare AGHF fund and in 2018 Abraaj returned the money it owed, plus interest.

The Economist quotes Linda Mateza of South Africa’s Government Employees Pension Fund, an Abraaj investor, saying: “We cannot afford not to invest in private equity because of the potentially higher returns.”

According to the 5 May Bloomberg report the audit into AGHF “had a ripple effect on private equity activity in emerging markets, and local buyout activity in the Middle East came to a near standstill”. The Economist magazine commented in May “Many large institutions have stopped investing in Africa and the Middle East, its home turf. In the year after its troubles became public, buy-out funds focused on the region raised just $1bn, a third of their annual average in the previous five years” citing figures from Private Equity International.

 “The firm’s problems were real. Its collapse last year consumed millions of dollars of investors’ money, the reputation of Dubai’s financial regulator and Abraaj itself. Even as rivals divide up the firm’s former empire, it threatens to cause yet more damage.” The article says Abraaj still owes over $1.2bn to investors. A letter by lawyers for investors in the $1.6bn Abraaj Fund IV is reported to claim that at least $300m went towards “wrongful transactions” and other funds could be owed tens of millions.

Do auditors help investors?

The Financial Times suggests that Abraaj’s auditor KPMG, which “exonerated the firm just a few weeks after the scandal broke” may have had a conflict of interest: “It transpired that KPMG had close ties to senior people in the business: the chief executive of KPMG’s Dubai arm had a son who worked at Abraaj, and one executive, Ashish Dave, had spent time at both Abraaj and KPMG”. KPMG also worked for companies that Abraaj invested into.

PwC, which became the liquidator for Abraaj, found a large funding gap and that the firm spent beyond its means and used other people’s money to fund the gap. The article interviews various experts.  Eamon Devlin, partner at MJ Hudson, an asset management consultancy that advises private equity investors, suggests changing auditor every 3 years, much like a listed fund has to, so that a 10-year fund gets through up to 3 different audit firms. He also says that investors should get “more investigative powers and responsibilities to look into these potential conflicts”.

One private equity executive says the industry should introduce requirements already used in US, UK and other places that an auditor working on one part of the business is not allowed to provide services to another part. Ludovic Phalippou, a finance professor at the University of Oxford’s Saïd Business School who authored the textbook Private Equity Laid Bare said; “[The Abraaj case] shows how much freedom there is for investors to be proactive. If they had been more proactive, [the alleged mishandling of funds] would not have gone unnoticed.”

Affiliate link: Phalippou writes on Amazon “The intention is to have a book that can be read more like a novel than like a regular textbook. In order to have long-lasting impact on readers, I believe in making things as simple as possible, boiling everything down to the essence, going straight to the point, and, most importantly, writing in an informal and hopefully entertaining way. The objective is for the reader to open this book with anticipation of having a good educational time. “

Warning about “less orthodox” private equity debts

Private equity fund managers (general partners or GPs) are using money promised by investors (limited partners or LPs) as security to borrow from banks. The Economist magazine says, in a recent article on the Abraaj crisis, says investors are becoming “warier of private-equity firms’ less orthodox tactics”.

The magazine says that GPs use these “subscription lines” to make investments without drawing down investors’ funds. This can then improve the returns they can offer investors – and by implication their performance fees. The article estimates about $400bn of this debt is used worldwide.

 It says that after Abraaj defaulted on several facilities, the banks called on the LPs to pay up. It quotes Kelly DePonte of Probitas Partners, which advises firms on raising capital: “They were not best pleased.”

The Economist claims the industry is getting more restrictive as LPs step up the amount of paperwork required, including reporting. This could mean that small and innovative firms – including some investing in Africa – may not be able to cope with the requirements as “side letters”—documents from each LP specifying the paperwork it requires from fund managers—now reach 100 pages, 10x what they used to be.

Guest post: Institutions funding infrastructure

By Gerald Gondo, Business Development Executive, RisCura

Never before has the need for infrastructure felt so immediate and acute. This became apparent to me as I travelled to Nairobi, Lagos, Lusaka and Gaborone during the first 3 months of this year.

RisCura has partnered with Africa Investor to launch Africa’s first infrastructure performance benchmark. The first results are expected in mid-2019 and will provide much-needed insight. This should facilitate increased investment into African infrastructure projects

A commonality I saw across all these African cities — the yellow metal equipment either excavating, tilling, scooping or pouring inputs — could result in an improved outcome for Africa’s infrastructure. According to the World Bank, closing Africa’s infrastructure quantity and quality gap has the potential to increase GDP per capita by as much as 2.6% per annum.

Historically, governments have borne the responsibility for infrastructure development as infrastructure is typically considered a “public good”. However, in most African States, governments are struggling to keep up with the level of development required.

To combat the continent’s infrastructure deficit, alternative sources of funding are needed, and institutional investors are increasingly seen as natural funding partners, given their long-dated liabilities that seek inflation-linked assets.

But, not all infrastructure assets offer the virtues of
hedging inflation. It is important for investors to understand the different categories of infrastructure assets, as well as the different life-stages of their development, as these result in different cash-flow profiles. There are 2 main types of infrastructure investment – greenfield and brownfield.

“Greenfield infrastructure investment” refers to investments that create new infrastructure – new development and construction. For an investor, some inherent risks of these projects include construction risk, performance risk and off-taker risk. The creation of the asset primarily involves funding the project, with risk of the project not reaching a stage of being commercialized. At this stage of development, the infrastructure asset would not manifest any inflation-hedging features.

“Brownfield infrastructure investment” refers to investments in existing and ready-to-operate infrastructure assets. These assets can potentially generate revenues. Given that the infrastructure now exists and is in use, the risks of investing into this project are substantially less than in a greenfield project where the future cash generation is uncertain.

Because many infrastructure assets feature monopolistic features (e.g. a toll road that all road users must utilise to access a specific town), cash generation for such assets is easy to model. Brownfield infrastructure investments are also often scalable; by enhancing the facilities, greater output can be produced and therefore greater cash flows. These features allow for the cash flows emanating from brownfield infrastructure investments to be modelled to escalate or be linked to inflation and the cash flows can be used to match against long-dated liabilities because of the long-dated nature of the operating capacity of most infrastructure assets.

With an understanding of the fundamental merits of the asset class, it is important to appreciate how institutional investors in Africa would traditionally approach the asset class. Prudential investment requirements might preclude them from taking up exposure to a single asset (e.g. one toll road) and they could invest in a diversified portfolio of infrastructure assets. This can be achieved by investing in a fund, where the fund is able to give investors diversified exposure to the asset class. However, it is important to appreciate that most infrastructure investments would be classified as unlisted investments.

Most institutional investors are relatively risk-averse and may not have investment mandates allowing for investing in unlisted instruments. Thus, for long-term savings to be channelled towards African infrastructure assets, the investment mandates (inclusive of the regulatory thresholds) would need to be revised to accommodate investments in unlisted instruments and more specifically, infrastructure assets.

In addition to revised mandates, institutional investors would benefit from a performance index for infrastructure investments in Africa. This would improve their ability to evaluate the available investment opportunities, monitor the performance of infrastructure investments and make better informed decisions on asset allocation.

RisCura has partnered with Africa Investor to launch Africa’s first infrastructure performance benchmark. The first results are expected in mid-2019 and will provide much-needed insight into investment in this sector, which should in turn facilitate increased investment into African infrastructure projects. In time, this should contribute towards closing Africa’s infrastructure gap and help boost economies across the continent.

International – new IPSX exchange opens property as global asset class

A new asset class has opened for investors as the International Property Securities Exchange in London prepares for its first initial public offer (IPO) in coming weeks. The IPSX Group is also planning exchanges in Germany, North America and Asia.

The first IPO is still planned for the end of Q1, depending on market conditions, after UK regulator Financial Conduct Authority (FCA) on 9 January issued a Recognition Order in relation to wholly-owned subsidiary IPSX UK Limited to operate a Recognised Investment Exchange (RIE) in the UK.

This is the highest level of authorization and means IPSX joins London Stock Exchange Group, Euronext, Intercontinental Exchange, CME Group, CBOE Global Markets and Hong Kong Exchanges and Clearing in operating an RIE.

City of London (with my former flat almost in view across river!), photo: Sky News

The new exchange will enable investors to invest in part of a building, and will free up groups with large headquarters or other assets to realize some of that equity. According to Anthony Hilton writing in Evening Standard: “It would allow people who own property, and particularly those who saw it as ancillary to their main business, to extract some of its value by floating its shares on the exchange”.

A company owning a single building would be able to float on the market, giving investors direct sight of the underlying assets. Building owners would no longer need to sell 100% of a building, they could sell a proportion, say 25%, and then buy it back later. The bourse also has eligibility requirements on portfolio commonality to allow “multiple asset issuers” onto the regulated market.

Hilton writes: “A company like pharmaceuticals giant GlaxoSmithKline, which has huge property assets to the west of London, could get some of the value by listing its shares and using the cash to help with its drug development.

“Similarly, the Football Association might float Wembley rather than try to sell it, as it apparently wants to, and use the proceeds for grass-roots football.”

According to a press release, IPSX Group Limited is a market infrastructure and data products business established in 2014 and dedicated to real assets – initially real estate. A strong group of investors include British Land, M7 Real Estate, Henley Investments, Daily Mail & General Trust and top business figures are on the board.

Another press release says: “Issuers on IPSX will be companies owning single real estate assets. For the first time, investors will have a choice as to where they invest and have direct sight of the specific underlying property asset that their investment relates to, with clarity over the revenues and costs associated with it, typically also benefiting from the tax efficiency conferred by REIT status.”

IPSX founder Anthony Gahan says: “From now on every type of investor can access the returns from institutional investment grade real estate by buying and selling shares in issues through IPSX. Imagine the man in the street buying shares in the company owning the building he works in, or even the Premiership football stadium where he watches his favourite team play.”

Gahan is quoted in CityAM newspaper: “We see it as the democratisation of the property market.”

Currently investment into large real estate deals is dominated by big funds and institutions, with smaller institutions and family offices going after the medium and small deals. Individuals can buy shares through property companies and real-estate investment trusts (REITs), which decide the mix of assets and when to buy or sell.

According to Hilton, the liquidity offered by the exchange may also encourage open-ended property funds. Previously investors into funds would have to wait to get their money out and the fund might have to take months selling properties in an illiquid market to get cash out at reduced values. That happened after the 2016 UK Brexit referendum to leave Europe, when there were a queue of redemptions and property companies dropped in price.

According to Hilton, the liquidity and clearer regulation of an exchange will change this: “Institutional investors focus on equities, bonds and real estate. But real estate has always been different because investors are in the hands of chartered surveyors who were the ones who ruled on value.

“In good times that could be more than expected; in bad times it could be worse because liquidity often dwindles just when it is needed. So property assets always have that degree of uncertainty. That too should change. Shares in the IPSX will enhance liquidity, and property in time could emerge as an equal, rather than a nice-to-have, asset.”

There is a pipeline worth billions, as owners of City of London and West End blocks could list on IPSX. Commercial real estate as a global asset class is estimated to be worth $30 trillion.

Tax authority HMRC is likely to recognize the exchange as admission/trading venue for REIT tax status.

The IPSX network infrastructure is being developed by Cisilion and IPSX is outsourcing operation of the trading platform to Cinnober and has its data repository and workflow management platform at Goldensource.

According to the press releases: “Importantly, for all, IPSX connects sellers with a new, deep, international investor universe at a time when some real estate assets are so valuable that few institutions are able to buy alone and private sale processes result in only one bidder submitting an offer to buy the asset… IPSX proposes to add further exchange-based products to its offering including a professional market for closely held REITs together with new real estate indices and data products.”

“Anthony Gahan added: ‘This is game-changing news for asset owners and global investors, many of whom have helped to actively shape the IPSX proposition.’”

Blockchain, crypto and the changes to stock exchanges in coming 2 years

Hirander Misra of GMEX, speaking at panel organized by lawyers Mackrell Turner Garrett on cryptocurrencies in London on 14 Nov, says: “We get 10 inquiries a week to set up a platform. The bar for setting up a blockchain or crypto exchange is moving much higher. In Mauritius and Abu Dhabi the bar is almost as high as for setting up a normal exchange.

“Digital currency is here to stay, in time some sovereign states will adopt it. In Venezuela, where currency collapsed, people have used bitcoin to get currency out, in Harare people have adopted it. Fidelity and others have started to dip their toes in the water.

“Independent crypto exchanges are opaque, it can be very expensive to get assets in and out. In the last 6-12 months, some of the big custodians have been getting involved, the large banks are going into custody, adopting own products, vaults, etc.

“We talk about ‘decentralized’ but everyone is protecting their own turf, we will end up in worse mess. It can be spaghetti.

“Securities exchanges are very much like they were 25 years ago, standalone, at the time when electronic trading came in. Unless you change you won’t be relevant. There will be change in the next 2 years.

“We still need for regulation and intermediaries, people still want institutions to be accountable. A lot of what we have done in last 30 years is still relevant, our challenge is to make it more efficient.”

GMEX
GMEX Group (GMEX) comprises a set of companies that offer leading-edge innovative solutions for a new era of global financial markets, providing business expertise, the latest technology, connectivity, and operational excellence delivered through an aligned partnership driven approach. GMEX uses extensive market infrastructure experience and expertise to create an appropriate strategic master plan with exchanges, clearing houses, depositories, registries, and warehouse receipt platforms. GMEX also offers the added benefit of interconnection to multiple partner exchanges, to create global networks of liquidity. GMEX Technologies is a wholly owned subsidiary of GMEX Group.

12 questions Silicon Valley investors ask – focus for African policymakers

African #tech superstar Alysia Silberg General Partner, Street Global Venture Capital, says she replies when asked what African policymakers can do to encourage investment into the tech sector in Africa, one focus is to look at the 12 investment questions of Silicon Valley:

1. Whether the government is stable?
2. Company incorporation structures and the limitation of liability?
3. The availability of reputable experts able to advise companies on their IP Protection and other assets?
4. Availability of legal recourse and the cost?
5. Whether or not there is a risk of asset seizure by government or any other organization?
6. The prevalence of fraud and corruption and whether it is a material risk?

L-R: Dawit Hailu (Wudassie Daignostic), Alysia Silberg (Street Global VC), Agnes Gitau (GBS Africa). Photo: AfricanCapitalMarketsNews

7. Reliability of infrastructure including financial and banking payments platforms and ease of international funds transfer?
8. Availability and productivity of a highly skilled workforce able to meet the needs of scaling business with a strong focus on Science, Technology, Engineering and Maths?
9. Whether or not “hotbed” exist for different niches and industries?
10. A progressive environment for diversity and women’s empowerment?
11. Whether any startups have succeeded at scale and its resultant effect on the surrounding ecosystem?
12. Availability of and ease of access to local capital for entrepreneurs, Not just for the first rounds of investment, but through a startup’s growth from startup to scaleup?

She was speaking at the UK-Ethiopia Trade & Investment Forum 2018 in London on 16 October 2018.

Do Africa’s $372bn pension fund assets facilitate inclusive growth and social stability?

One of the key challenges pension funds face: identifying enough appropriate, local investment opportunities to invest ever-increasing contributions
• Deregulation of prescription will unlock capital to flow where it is required in Africa

RisCura’s annual Bright Africa 2018 report is a highly recommended read on Africa’s capital markets. Check out the interactive website and download the short report at brightafrica.riscura.com.

Africa’s pension fund assets are now thought to be $372bn, according to leading pension fund consultancy RisCura. Some 90% of these assets are concentrated in Nigeria, South Africa which has $307bn in AUM, or 82%, Namibia and Botswana. Further, a few large funds dominate, including: Government Employees Pension Fund (GEPF) in South Africa, Government Institutions Pension Fund (GIPF) in Namibia, Botswana Public Officers Pension Fund (BPOPF), and a few large funds in Nigeria.

(NOTE, in a comparable story in 2015 we noted that total pension fund assets in 10 African countries were $379 billion in assets under management (AUM),85% or $322bn of this was based in South Africa. The change since 2015 may partly be due to currency decline at the time of compiling the statistics)

According to the Organization for Economic Cooperation and Development (OECD), total pension fund assets in OECD member countries in 2016 totalled $38 trillion, of which $25trn is held in the US, followed by Canada ($2.4trn) and UK ($2.3trn), the three countries making up 78% of the total pension assets.

In OECD countries, pension funds made up 50% of the economy, measured in gross domestic product (GDP) in 2016, up from 37% in 2006, while in other countries measured (“non-OECD countries”), they rose to 20% of GDP from 12%.

The table below shows pension fund assets in selected different African markets, according to data collected by RisCura. Assets under management (AUM) total $306.7bn in South Africa (pension AUM are 104% of GDP), $16.8bn in Nigeria (lots of space to grow as pensions are 4% of GDP), $10.7bn in Kenya (16% of GDP), $10.5bn in Namibia (99% of GDP), and $7.2bn in Botswana (48% of GDP). There is huge potential for growth in Egypt where pension AUM are estimated at 1% of GDP, Tanzania (10%) and Uganda (7%), Ghana (7%) and even Zambia (3%).

African Pensions statistics collated by RisCura

In OECD and non-OECD countries, pension fund assets are predominantly invested into bonds and equities, with 45% of assets allocated to equities. As capital markets have grown and regulators have advanced, the proportion of African pension funds invested into equities has increased, but in Nigeria and East Africa local currency bonds predominate. Local regulation is a key driver of asset allocation and often does not match the opportunities: “In many countries assets are growing much faster than products are being brought to market, limiting investment opportunities if regulation does not allow for pension fund to invest outside of their own countries” says RisCura.

“African pension funds have a pivotal role to play in facilitating inclusive growth and social stability. Larger pools of capital allow for investment in economic and capital market development,” argues the Bright Africa report. It says there is an urgent need to build resources: “Local institutional investors add credibility and often serve as a catalyst for greater external interest. Local investors also allow global peers to leverage local knowledge and networks.”

RisCura urges other countries to follow the lead of South Africa, Nigeria, Namibia and Botswana (we can also add Kenya to this list) in allowing pension funds to invest into private equity – in Nigeria the National Pension Commission (PENCOM) allows for 5% of assets into private equity as an asset class, which would amount to $842m on 2016 figures, but 75% must be invested in Nigeria and general partners have to be able to invest at least 3% in the fund, limiting the options and size of investment.

The report also highlights a huge role for supporting Africa’s urgently needed infrastructure development (Africa Infrastructure Country Diagnostic estimates $93bn per year of investment needed). However, it is important that frameworks created are compatible with the mandates and risk and liquidity factors, as well as “mindful of prudential oversight and limits necessary for pension and savings investment” says RisCura.

For these stats and more on the changing dynamics of retirement in Africa, download the excellent Bright Africa report and visit the interactive website. More than half, 52%, of African males over 65 years and 33% of females were “active in the labour market” in 2015, compared to 10% older men and 6% older women in Europe. Pensions in Africa are also seeking to adapt to the fact that many Africans earn and save informally, including Micro Pension Scheme in Nigeria where the informal sector is thought to be 70% of the workforce with 38m potential contributors and the Mbao Pension Plan of Kenya, using M-Pesa or Airtel Money mobile transfer services.

How big are African pension funds?

Here are selected findings from a recent hunt through the Internet:

According to a recent report by PricewaterhouseCoopers, “Africa Asset Management 2020” (get your copy here) total assets under management in 12 selected Africa countries were $293 billion in 2008, more than doubling to $634bn by 2014. They are forecast at $1.1 trillion in 2020. (The 12 countries are: South Africa, Morocco, Mauritius, Namibia; Egypt, Kenya, Botswana, Ghana, Nigeria; Angola, Algeria, Tunisia).

Pensions are increasingly important as many countries set up and grow pension schemes. Mauritius and Ghana are examples of countries with 3-pillar pension systems and some countries are starting to revise their regulations to allow pension funds to invest more widely than just into domestic bonds, money market and equities

How big are the funds and are do they invest in infrastructure?

The giant African pension fund is South Africa’s Government Employees Pension Fund (GEPF), which had an investment portfolio of ZAR1.67trn ($124bn) at 31 March 2017 while accumulated funds and reserves grew at 10.2% a year for the last decade, according to the latest annual report.

The fund has 14 direct investments in 904MW of renewable energy including Bokpoort (50MW concentrating solar power CSP), wind and the 175MW photovoltaic (PV) Solar Capital Plant. GEPF has also backed 646 housing projects and unlisted investments include ZAR3.9bn ($290m) into the Pan African Infrastructure Development Fund run by Harith General Partners, ZAR2.4bn into South Africa’s airports and ZAR996m in telco MTN Nigeria, with a total of 1.2% of assets in infrastructure including roads and power in South Africa and across Africa.

Next-door Namibia has 2.5m people and David Nuyoma, CEO of the Government Institutions Pension Fund (GIPF) told a workshop in October 2017 its total assets were N$105bn ($7.9bn), 64% of the nation’s gross domestic product. Its unlisted portfolio includes residential, tourism and commercial developments, solar power and an infrastructure fund run by Old Mutual.

Botswana Public Officers Pension Fund has assets under management of BWP54.6bn ($2.6bn), including BWP11m invested with Harith.

Other markets are growing fast. In September 2017, Nigeria’s Pencom put pension fund assets at NGN7.16trn (down to $20.1bn after currency falls) of which NGN5.2bn was in infrastructure funds and NGN221.5bn in real estate including real-estate investment trusts (REITS). Earlier the industry had been growing by 30% a year from 2008-2015. There are 2015 regulations governing investment into infrastructure, and fund managers Asset and Resource Management Company and Harith General Partners, based in South Africa, have teamed up to create a $250m infrastructure fund for West Africa that meets the requirements.

 

Source: PricewaterhouseCoopers

In December 2016, Kenya’s Retirement Benefits Authority then CEO Edward Odundo said the industry would be KES1trn ($9.8bn) by the end of that month. The regulator is investigating structures for pensions and other funds to invest in road Government-led infrastructure such as Nairobi-Nakuru-Mau Summit superhighway (report in Nation newspaper)

Investments of social security schemes in Tanzania were TZS7.8trn ($3.6bn) in June 2015 and had grown 17% in the year, according to the Social Security Regulatory Authority (SSRA). The National Social Security Fund invested for 60% of the $140m Kigamboni toll bridge (Government has 40%).

Social Security and National Investment Trust (SSNIT) in Ghana, has assets GHS8.8bn ($2.0bn) and is invested in power projects, housing, health and other infrastructure in support of Government initiatives.

 

(Figures from author’s Internet research of annual reports of regulators and funds or recent news updates)

African pensions and infrastructure investment – recent research

Learning from Latin America
The challenge to create structures so that pension funds can invest in local infrastructure projects and help develop the capital markets has led to some innovative ideas across Latin America. There are lessons for African regulators of pensions and social security as well as for those promoting public-private partnerships for a full range of African infrastructure, including roads, bridges, telecoms, hospitals and house. Here are a couple of examples (from a 2017 World Bank paper by Fiona Stewart, Romain Despalins and Inna Remizova).

Mexico’s CKDs (Certificados de Capital de Desarrollo) securities are traded on the Mexican Stock Exchange (Mexican Bolsa/BMV) and were created in July 2009 with the mandatory pension funds (Siefores) as their key source of capital. CKDs are designed to boost infrastructure projects from ports to electricity and water, and real estate amounted to 30% of the total since 2009. Regulator CONSAR has deregulated investment restrictions for Siefores in stages to allow them to invest into private equity, real estate and infrastructure projects through CKDs.

Peruvian funds have created trust structures to allow pension funds to invest in infrastructure projects. The World Bank has helped Columbia develop infrastructure debt funds which pension funds can invest into.

 

Excellent recent research

Several excellent papers have been published this year. Here are some of them, with links to their sources.

  • Maurer, Klaus (April 2017). “Mobilization of of Long-term Savings for Infrastructure Financing in Africa”. Study prepared for Germany’s Study prepared for Federal Ministry for Economic Cooperation and Development (BMZ). Bonn. Deutsche Gesellschaft fur Internationale Zusammenarbeit (GIZ) GmbH, available here. Sources include 2 articles on this blog in Feb 2017 and in Mar 2015!
  • PricewaterhouseCoopers (2017). “Africa Asset Management 2020”. PwC. Download here.
  • RisCura (current). Bright Africa. Cape Town. RisCura. The report was published in 2015 but the website is interactive and updated, check out the excellent information and stats here.
  • Stewart, Fiona, Romain Despalins and Inna Remizova (July 2017). “Pension Funds, Capital Markets, and the Power of Diversification”. Policy Research Working Paper. Washington, DC. World Bank Group. Download via here.
  • Sy Amadou (Mar 2017). “Leveraging African Pension Funds for Financing Infrastructure Development”. Washington, DC. African Growth Initiative of The Brookings Institution with NEPAD and the United Nations Office of the Special Advisor on Africa (OSAA). Available from Brookings.

Another good resource is African Development Bank’s Making Finance Work For Africa (MFW4A).

Tanzania’s Kigamboni Bridge, an investment by NSSF (Credit Nairobi Wire)