February 19th, 2016 by Tom Minney
Here is an interesting chart about the African continent in comparison with other economic regions. And it is not just its size, but also the fast rate of growth. This is copied from the report by McKinsey & Company: Insights into pharmaceuticals and medical products. Africa: a continent of opportunity for pharma and patients published April 2015.
The table gives some of the trends that are likely to shape the environment for Africa’s securities exchanges in coming years.
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.
November 28th, 2014 by Tom Minney
Here are 9 reasons why Africa is topping long-term investors’ agenda. According to press releases Eddy Njoroge, Chairman of the Nairobi Securities Exchange, told this week’s African Securities Exchanges Association conference in Kenya they are:
1. Recent research by economists indicates that 9 of the 20 fastest-growing economies are in Africa.
2. A recent report by Deloitte states that Africa’s economy will grow from $1.1 trillion to $3.9trn in the next 5 years.
3. The value of exports from Africa has risen from $170 billion in the late 90’s to $800bn last year. Africa is the only continent to have a trade surplus with China which would probably explain why several Chinese firms are setting up shop on the continent.
4. According to the African Development Bank, Foreign Direct Investment (FDI) into African economies will reach a record $80bn this year, with most of the money being directed to countries without natural resources but which nevertheless present attractive opportunities in other diverse sectors.
5. Today, Africa is the second most populous continent on earth with a current estimated population of 1.12bn. The Washington-based Population Research Bureau estimates that this population would more than double to 2.4 bn by 2050, with sub-Saharan Africa making up a headcount of 2.2bn.
6. Currently, the African middle class is estimated at 123 million with a projected rise to 1.1bn by 2060. Investor and philanthropist George Soros has termed this demographic shift as “the world’s fastest growing middle class.”
7. Infrastructure has played key part in Africa’s recent economic transformation and will need to play an even greater role if the continent’s development targets are to be realised. Africa’s largest infrastructure deficit is to be found in the power sector. The 48 countries of Sub-Saharan Africa less South Africa (with a combined population of about 780m people) generate roughly the same amount of power as Norway (with a population of 5m).
8. It is estimated that Africa’s infrastructural investment requirement will be $38bn per year and a further $37bn for operations and maintenance- an overall price tag of $75bn per annum. This translates into some 12% of Africa’s GDP. There is currently a funding gap of US$35bn per year.
Njoroge said Africa’s securities exchanges are key: “The conference gives us the opportunity to tell our own success stories; the story of an Africa that is on the rise and how we, the capital market practitioners, can transform a potential into a reality while ensuring that at all times, the fruits of economic success are widely shared across the population… Strengthening stock exchanges to support our capital-markets ecosystem will fuel economic growth. The Nairobi Securities Exchange will continue to work together with other stock exchanges strengthening Kenya’s position as East Africa’s financial services hub.”