Issue: September 2012 / November 2012
Expert Opinion

GEPF looks to rest of Africa for investment growth

South Africa’s largest pension fund leads the way

Africa has long been neglected as an investment destination for SA pension funds and other institutional investors. It is this neglect that the Government Employees Pension Fund (GEPF) wants to change.

We believe that Africa is a continent ripe for investment. With over one billion people and a rapidly growing middle class, Africa (excluding SA), in tandem with the rest of the developing world, presents exciting opportunities for investment growth. Almost stagnant growth in developed economies and worsening sovereign-debt challenges in Europe make going into Africa all the more logical.

To this end, we have set aside 5% of our more than R1 trillion of assets under management for investments in businesses operating in Africa. The continent has indeed stepped into the limelight as a more prominent emerging-market player. We are well-positioned to take advantage of vast investment opportunities, particularly in the infrastructure space.

Huge opportunities had been overshadowed by a legacy of conflict, corruption and economic crises. Of late, however, the region has seen a broad range of reforms. Infrastructure initiatives are opening new avenues of commerce. New efforts towards regional integration and strengthened regulatory and legal systems are providing greater levels of transparency and accountability.

Our Africa investment strategy is directed at promoting development, job creation and improving the lives of Africans while growing its investment. By end-2011, GEPF had invested about R825m in the Pan-African Infrastructure Development Fund (PAIDF). This represents about 0,1% of our total portfolio.

The PAIDF, managed by Harith Investment Managers, has exposure in various African markets. Transport, telecommunications and infrastructure are the sectors mainly targeted.

Although affordability remains a major obstacle to development, international consensus is that Africa would be the economic powerhouse of the future. It was the poor state of Africa’s infrastructure that hindered its growth rate.

Through our investments in the PAIDF, we have exposure in the Monastir concession that owns both international airports in Tunisia; Dark Fibre Africa and Dartcom that have provided state-of-the-art undersea broadband optical fibre cabling of which Vodacom is the main client; Main One which provides and operates the broadband cable system that links Niger and Ghana to the rest of the world.

In addition, we have exposure to the Aldwych power company which has power stations in Kenya and Zambia; the Nigerian majority-owned SeaWolf Oilfields Limited and Essar Telecom Kenya Holdings which holds a 90% stake in Econet Wireless in Kenya.

To us, Africa is more than merely the resources story.

Growth had also recently been accelerated by strong economic fundamentals. They include improving debt ratios, favourable demographics, emerging consumer demand, improving political stability, stable currencies and rising foreign reserves.

The economic sectors that showed the greatest growth potential were agriculture and agro-processing; resources particularly mining; infrastructure; social infrastructure; manufacturing, environmental and sustainability projects; telecommunications and ICT; the financial sector and property.

Asset allocation to various sectors would be guided by such important factors as macroeconomic fundamentals, political stability, demographics, the level of financial-markets integration or development, and the ability to exit.

Research shows that investors are now worried more about technical concerns than about macroeconomic and political risks, at least in key markets. To some extent, Africa’s biggest challenge is to overcome deeply-entrenched perceptions. But a striking shift that can be observed among investors is a change in focus from macroeconomic and political worries towards more technical market concerns. This is good for the continent.

For instance in sub-Saharan Africa, GDP growth is expected to average 5% over the next 10 years -- significantly higher than the 2,6%-3% expected in SA and the 1,5% expected in western Europe. Indications were that many countries in Africa would exceed 7%; for example Ghana (8,6%), Ethiopia (7,9%) and Uganda (7,7%).

Interestingly, while growth prospects are compelling, the risks remain high particularly in politically unstable environments. Investments in high-risk markets must be preceded by a thorough risk assessment and possible mitigation strategies.

To the extent that political risk cannot always be successfully mitigated, some countries would not qualify as investment destinations.

Regions presently posing investment risk include North Africa and the Sahel. These would be excluded from the first phase of the strategy implementation. This is largely due to political unrest and instability.

A belief that Africa is rife with bad corporate governance is greatly exaggerated. It can, however, be an issue in the small and medium enterprise space that is not publicly listed. Hence our private-equity activities in Africa need a lot of monitoring by personnel on the ground to contain such risks.