Africa’s Pinched Pension Fund Alternatives
A joint study by the EMPEA private equity trade association and the UK Commonwealth’s Africa finance initiative surveys pension fund alternative asset class scope in ten countries to reveal scant mobilization despite an estimated $30 billion in long-term private funding and management assistance available. Dedicated emerging market sponsors have a 10-year life cycle and have received over $375 billion in commitments the past decade for over one-tenth the global total. The Sub-Saharan sum was almost $2 billion in 2013 as it was the most attractive region in an annual ranking. Of the $7 billion raised the last five years, development finance institutions took the lead, as regulations began to change for domestic retirement scheme entry. In South Africa updated allocation guidelines permit 10 percent in venture capital and Nigeria’s is 5 percent the portfolio with three-quarters the category to be local exposure. Botswana and Kenya allow it under a general “other assets” stream, while in Zambia the rules are unclear. Pension fund overall size runs the gamut from South Africa’s $325 billion to Rwanda’s $500 million, and the continent’s eligible pool is less than CALPERS $50 billion invested alone in the US and abroad. African double-digit public stock and bond returns have been another impediment to consideration limiting the rationale to long-term diversification. Small and mid-sized firm opportunities are particularly constrained by undeveloped securities markets and large company liquidity and safety preferences. In the same vein tiny locations like Namibia, where pension holdings are 90 percent of GDP, must look cross-border, and the East African Community recognizes the imperative with equal treatment of home and regional instruments. The African Private Equity Association’s initial fund manager poll this April contemplated a 2 percent increase by mid-decade but stressed sizable knowledge gaps in oversight and selection. General partners believe benchmark evaluations, such as a recent one by Cambridge Associates showing 10 percent-plus average returns the last decade, can provide catalytic information and insight, and that the typically young contributor age offers a long learning curve and timeframe for recouping bad decisions. For big government social security plans board trustees setting policy are usually political appointees with little financial market understanding and object to higher fees associated with venture capital. Current Nigerian engagement is only $55 million with the array of structural requirements imposed, including SEC registration and development lender participation. Supervisors did not have all the provisions and personnel in place to process applications, creating months of backlog, the report notes.
In contrast to the pension squeeze, the IIF’s latest reading of Sub-Saharan bank lending conditions registered improvement across-the board with the index up to 52.5. Consumer, business and trade finance all rose and NPLs declined. The emerging economy composite overall passed 50 for the first time since early 2013, although Asia and Latin America saw deterioration and Europe’s respite may not last with the Russian financial sector sanctions clench.
