Edition: March - May 2015
EXPERT OPINION

Growing African pension funds:
an opportunity for private equity.

African pension funds with growing asset bases, due to rising incomes, will need to look beyond traditional asset classes to diversify their portfolios. Given private equity's long-term nature -the typical life cycle of a fund is 8-10 years -the asset class is an obvious choice.

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In Nigeria, the pension fund industry has grown tram USD7bn in 2008 to USD25bn in 2013 while Ghana is expected to see growth of 4{)0% in assets under management (AUM) over the four years to 20 I B.In Namibia, pension assets are around 80% of GOP and 40%for neighboring Botswana

It is estimated  that there is at least USD29bn in funds available for African pension funds to channel into private equity investments. This number is based on the findings of a study of the assets under management  (AUM) of only ten African countries' equity.

Funds could invest US$29 billion in PE

According to the Commonwealth, the Making Finance Work for Africa Partnership Secretariat and EMPEA Report, the ten countries listed in the table below have a combined AUM of approximately USD380m. Based on the amounts that pension funds are allowed to invest in private equity in each country there is capacity for USD35bn to be invested. Of this figure, between USD3.8bn and USD5.7bn is currently invested in private equity. This equates to a shortfall of around USD29bn available for investing. In practical terms, it is likely that only a portion of this will actually be invested, as pension funds are unlikely to use their full allocations.

riscura-2 Source: Adapted from the Commonwealth, the Making Finance Work for Africa Partnership Secretariat and EMPEA Report 2014.

In developed markets, private equity has become a key component of pension fund portfolios. This is due to increasingly favorable pension fund regulations and private equity's historically high returns.

For the ten-year period ended 30 September 2013 the Europe Developed Private Equity and Venture Capital Index (15.9%) and the US Private Equity Index (14.2%) outperformed both the Russell 2000 (9.6%) and the S&P 500 Index (7.6%).

Pension regulations revised

Several major African countries have revised pension regulations in recent years, with many either considering or actually revising rules around investments into private equity. These  changes have yet to cause a significant change in allocations of African pension funds, but there have been some allocations by larger funds, particularly from South Africa, and more recently from Namibia, Nigeria and Kenya.

Despite the challenges of Africa's nascent private equity industry. it has seen a growing inflow of investment funds as institutions realise the real growth opportunities the continent offers as1he next frontier. This change in perception is reflected strongly in a recent Market Attractiveness survey performed by EMPEA. This survey ranks the relative attractiveness of various emerging markets to global institutional investors.

PE funds can play developmental role

This point is even more pertinent given that many African countries have poorly developed capital markets and a lack of long-term financing. This makes private equity an attractive alternative to companies seeking capital. In addition, there is the active role general partners (GPs) can play in managing portfolio companies and the increasingly important economic developmental role private equity funds can play as a by-product of achieving commercial returns.

The hands-on nature of private equity funds provides strategic assistance to businesses helping them grow and develop, which has many positive side-effects to an economy. These include job creation, an increased tax base and economic growth.  Given 1he lack of infrastructure and economic development in many African countries, these  funds have an important role to play in improving this situation and promoting economic growth continent wide.

For more information on the role of private equity in your fund, contact

Natalie Brink on +27 (0)21 673 6999 or nbrlnlc@rlscura.com

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