Unlocking African Institutional Capital for Private Investment in Africa

Oct 05, 2012
Sub-Saharan Africa has come to represent one of the biggest growth stories in emerging markets private equity. According to the Emerging Markets Private Equity Association, fundraising by fund managers for Sub-Saharan Africa rose from US$800 million in 2005 to over US$2.2 billion in 2008, before falling back to US$960 million in 2009 and rising to US$1.5 billion in 2010.
2011 saw fundraising fall slightly to $1.3 billion, with $490 million raised in the first half of 2012. Fundraising for Africa has been led by development finance institutions, international commercial banks, pension funds and even foreign private investors (family offices). According to an EMPEA / Coller Capital published in 2011, 38% of LPs planned to “begin or expand Africa commitments”. This compares with just 16% a year earlier. The same study found that 67% of LPs found Africa “attractive or very attractive”, compared with just 37% in 2010. With increasing foreign interest in private equity in Africa, the issue of local capital (or lack of it) in private equity in Sub-Saharan Africa has become a hot topic for the industry.

Long term savings vehicles (mainly pension funds) are uniquely placed to manage the long investment term and limited liquidity of private equity. In the African context, domestic pension funds would also capture a significant performance premium and the benefits of portfolio diversification. Based on latest available figures, if the largest African markets by assets under management were to invest 5% of their portfolio in private equity, a potential US$17 billion could be released to support private sector investment in Africa. Increased local capital could also play a catalytic role in attracting international capital to the continent. With assets under management in major countries like Nigeria increasing at 30% a year, this potential is set to increase still further in future. Unlocking this potential means addressing the many challenges that African institutional investors face. First among these is the lack of awareness about the asset class across the continent. Even in South Africa, with its sophisticated financial markets, few pension funds have experience of or knowledge of private equity. One of the basic principles of successful investment is “stick to what you know”, so until African pension funds become more familiar with the asset class, the dream of an industry led by or with significant participation from local investors will remain just that. Achieving this requires understanding and openness, from the industry (fund managers and investors), local investors, policy makers, regulators etc. Pension funds, regulators and other stakeholders must be empowered with the right information which enables them to evaluate if and how private equity fits within their investment strategies and objectives. It is in this context that the Commonwealth Secretariat has worked with the African Development Bank (AfDB), the African Venture Capital Association (AVCA), and Aureos Capital organised a series of regional roundtables on Private Equity in Africa, to:
  1. Introduce participants to private equity as an asset class;

  2. Familiarise participants with the private equity industry in Africa and provide the opportunity to meet with fund managers, investors and other stakeholders;
  3. Provide participants with an understanding of the structure of private equity funds, their operations and governance, and
  4. Identify next steps to promote increase local participation in the private equity industry in Africa.
Regional roundtables have been held, in Nairobi (for East Africa) in May 2010 and Gaborone (Southern Africa) in October 2010 and Accra (West Africa) in May 2011. A pan-African workshop was also held as part of the AVCA conference in Accra earlier this year. Country events have also been held in Kenya (March 2011) and Nigeria (September 2011) in partnership with their respective pensions regulators. Feedback from these roundtables has been overwhelmingly positive. The regional approach has worked well in terms of raising awareness of the private equity and the barriers to increased participation in the industry by domestic investors. However, different levels of awareness and country level regulation means that there are different priorities / needs amongst the countries, even within the same sub-region. Specific recommendations for follow up activities have included:
  • Education and capacity building at all levels for all stakeholders
    (including regulators, other institutional investors,
    policy makers and lawmakers) Policy makers in particular need a better understanding of
    private equity kind of environment in which it can thrive;
  • Practical assistance for the development of appropriate regulatory regimes and knowledge sharing amongst stakeholders, and;
  • Further research into private equity in Africa – areas of focus would include regulatory environment, funding raised, local participation levels etc.
In parallel with this educational effort, several African countries are in the process of reforming and liberalizing the pension sector. The revised Regulation 28 of the Pensions Fund Act in South Africa is probably the best known example of this. Under the regulation, institutional investors can invest up to 10% of assets under management in unlisted equities. This is up from historical figures of 5%, which encompassed all alternative asset classes, to a universal figure of 15% for both private equity and hedge funds. This is indeed a significant development, even more so now that the Public Investment Corporation has announced that it is looking at committing some$3.8 billion to private equity, following these changes.
Reform in Nigeria is also paving the way for pension fund investment in unlisted equities.
The regulator, National Pension Commission (Pencom), was established in 2004 to regulate and supervise the pension fund industry. With total pension fund assets of approximately US$13 billion as at December 2010, and a growth rate of close to 30% per annum , Nigeria represents a potentially significant source of funding for the private equity industry.
Prudential limits for private equity and alternative assets have been capped at 5% of assets under management. However, the regulations also require a minimum of 75% of funds need to be invested in companies or projects in Nigeria, and among other requirements, funds need to have multilateral development finance institutions (DFIs) as Limited Partners.

Some commentators have argued correctly, that these requirements are unnecessary and pose a few problems for general partners and pension funds alike. A 75% exposure requirement to Nigeria effectively creates a Nigeria fund, concentrating risk – country, currency and political. The nascent nature of private equity in Nigeria and Africa in general is such that Pencom should be encouraging pension funds to use private equity as a risk diversification tool.
In looking at private equity alongside other asset classes – how much diversification is being achieved by pension fund managers? Are potential political and economic considerations coming at a cost to a pension fund’s mandate and returns?
The issue is slightly different from a regulators standpoint. Their first duty is to protect the pensions of their fellow citizens. In that context, it would be unwise (to put it mildly) to allow pension funds unfettered access to invest in an asset class which neither they nor the regulators are fully familiar with. We only have to look to the origins of the global financial crisis to understand the potential damage that could cause. In that context, the slowly slowly approach taken by some regulators seems reasonable. The idea behind the additional restrictions in places like Nigeria is to get the pension funds to learn from experienced LPs (hence the requirement for DFIs) and then slowly lift these restrictions. From a market development point of view, it is hard to argue with that. It is also worth noting that despite these restrictions, some fund managers have successfully raised not insignificant sums from Nigeria. Yes the structuring has been perhaps more costly and complicated, but it can and has been done.
In the end, whether we see increased domestic capital in African private equity (and perhaps who gets that capital) will depend significantly on the willingness and capacity of fund managers to invest time and energy in engaging with and understanding local investors and regulators:
What are their issues? What are the risks from their point of view? How can fund managers, existing LPs and industry associations work with them to resolve these? That is the true challenge of unlocking African institutional capital for private investment. David joined the Commonwealth Secretariat in May 2007. He leads the Secretariat’s investment and private sector development programmes, including the Commonwealth Private Investment Initiative (CPII). CPII has helped to raise US$800 million for investment in Africa, South Asia and the Pacific through a series of private equity funds.
has been leading efforts to unlock local capital in Africa through a series of workshops for institutional investors, regulators and other stakeholders over the past two years. David previously worked for the International Finance Corporation (IFC) in Cote d’Ivoire, Cameroon and South Africa. Prior to IFC, he was a Project Officer responsible for Infrastructure at the Agence Française de Développement in Ghana. David has also worked as an Analyst in the Corporate Finance Department CAL Bank in Accra, where he set up and managed the bank’s brokerage subsidiary.

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