The Hot New Africa Investment Trend: Pension Funds
Economic reforms are fostering the growth of retirement assets and making the region’s nascent pension fund industry an attractive target for Western investors.
Since it was founded a decade ago, Helios Investment Partners has earned a reputation as one of Africa’s largest and most innovative private equity investors. The London-based firm manages some $2 billion in investments that run the gamut from mobile telecommunications operators to oil and gas ventures to shopping malls. But the outfit’s latest deal may be its most significant to date: Last month Helios acquired a minority stake in ARM Pension Managers, a $2.2 billion-in-assets subsidiary of Asset & Resource Management Co., Nigeria’s largest private sector pension fund manager.
Helios is following a path blazed late last year by LeapFrog Investments, an emerging-markets private equity firm backed by Western pension funds that paid $3 million for a 25 percent stake in Petra Trust, one of the three largest private pension fund trustees in Ghana.
Suddenly, African institutional investors are some of the hottest investments in Africa. The continent’s nascent pension fund industry is growing rapidly in size and ambition, a product of the region’s robust economic growth and reforms in a number of countries. These pension funds promise to provide a much-needed source of indigenous capital for development in a region that has long relied on official aid and direct investment from resources companies. The funds are attracting interest from international investment firms, which can provide expertise in exchange for access to deals and co-investment opportunities.
“What we’re beginning to see is the emergence of an ecosystem,” says Hubert Danso, CEO of Africa Investor Group, an investment and advisory outfit based in Johannesburg. African pension funds will become increasingly important investors in public and private markets, both at home and across borders on the continent, and will attract Western pension funds and institutional investors as partners, he says. “Within three, four years you’ll see a transformative industry,” Danso says. “It’s the big push that’s going to happen.”
In addition to the promise of deeper domestic pension pools to fuel growth and development, the continent’s biggest manager of pension assets, South Africa’s Public Investment Corp., is looking to expand its investments across the region. PIC, which boasts 1.6 trillion South African rand ($148 billion) in assets, has been making its influence felt. It paid $250 million in 2012 for a 20 percent stake in Ecobank Transnational, a Togo-based bank with operations across the continent, and earlier this year it agitated successfully for the removal of the bank’s CEO, Thierry Tanoh, over allegations of mismanagement.
Nigeria offers a hint of the potential for the region’s growing pension industry. The country’s retirement funds have experienced phenomenal growth since the government introduced reforms, beginning in 2006, that transformed a largely unfunded defined benefit scheme into a defined contribution system that mandated participation from all employees covered by pension plans. The industry has nearly tripled in size in the past five years, to some $25 billion in assets, even though less than 10 percent of Nigeria’s workforce is enrolled in a pension plan. What’s more, the government is in the process of liberalizing regulations on the industry to allow pension funds to put money into certain alternative investments, including private equity, and to invest outside Nigeria. With presidential elections looming in February, it may be mid-2015 before everything is settled and implementation begins, says Razaq Ahmed, executive director of Sart Partners, a Lagos-based money management firm.
“About this time next year, you’ll see some hard traction,” says Ahmed, who lauds the Helios-ARM deal as a sign of things to come. The private equity firm can help guide ARM in its investment diversification and benefit from the growth of Nigeria’s pension fund industry, he adds.
Helios executives declined to comment on the deal, but in a statement managing partner Tope Lawani called the Nigerian pension fund market massively underpenetrated. Terms of the deal weren’t disclosed, but local media reported that Helios was investing $50 million in ARM.
Using a combination of public and private sources, Institutional Investor estimates that sub-Saharan Africa’s ten largest pension fund markets held approximately $310 billion in assets at the end of last year. Of these countries, South Africa is by far the largest, with assets of some $252 billion, or about 80 percent of the total. But the strongest growth is coming in countries like Botswana, Ghana, Kenya, Nigeria and Uganda, which have moved in recent years to expand and liberalize their pension systems. In a 2012 study Renaissance Capital projected that pension funds in sub-Saharan Africa’s six largest markets will balloon to $622 billion by 2020 — an estimate the firm’s global chief economist, Charles Robertson, calls conservative. RenCap, a Moscow-based emerging-markets specialist with offices in Johannesburg, Lagos and Nairobi, estimates that total assets will swell to $7.3 trillion by 2050.
The reasons for the industry’s upside potential are clear. The International Monetary Fund projects that economic output in sub-Saharan Africa will expand by 5.4 percent this year and 5.5 percent in 2015, trailing only developing Asia among the world’s major regions. Although a small minority of the population enjoys pension coverage today, the numbers seem destined to grow rapidly. A mere 10 percent of what is termed the “economically active” population in sub-Saharan Africa is covered by mandatory pension schemes, according to the International Labor Organization, compared with nearly 80 percent in North Africa.
Traditionally, government social security systems have held a monopoly on pension management and administration in all countries save South Africa and a few of its neighbors. Those systems covered a small universe of government employees and workers in large companies. Left outside were the vast majority of workers laboring in agriculture and the informal sectors of the economy. (Even in South Africa less than 15 percent of the agricultural workforce had any kind of pension in 2009, according to one labor survey.)
Lately, a growing number of countries have embraced pension reform. In addition to widening mandatory coverage and instituting voluntary contributions, countries have been opening their systems to competition from private pension funds. Some of the results have been impressive.
Although statistics on African pension funds are hard to come by, 27four, a South African investment manager, estimated last year that the industry’s assets grew at an average rate of 10 percent a year from 2007 to 2012.
In 2001, Botswana switched from a defined benefit system to a defined contribution plan, extended coverage to more of the working population and opened the market to private competition. Today, Botswana has about 100 pension funds jostling for business in a country with a population of only 2 million. Ten funds dominate the market, which has grown in both size and sophistication. “The competitive landscape has improved the professionalism of the industry,” says Alphonse Ndzinge, chief investment officer of Afena Capital Botswana, which manages money for some of the country’s pension funds. Those funds had combined assets of some $6 billion in 2012, or 42 percent of GDP, according to the Bank of Botswana. Only Namibia and South Africa boast a higher percentage among sub-Saharan African countries.
To date, African pension reform has been more successful at amassing capital than deploying it, which explains why firms like Helios and LeapFrog see such potential in the industry.
In most markets the default investment remains domestic Treasury bills and government bonds. In Nigeria, for example, about 80 percent of pension funds go into bonds. Most governments encourage that asset class; many demand it. They consider public pensions a major source of debt financing and, by extension, a vehicle for financing favored development projects. “In a lot of countries, pension reform represents a threat to the government,” says Kofi Fynn, who heads Ghana’s Petra Trust.
Africa Investor Group’s Danso, who advises both African and Western pension funds, echoes the point. “Many regulatory bottlenecks keep pension funds from accessing the underlying areas of economic growth,” he says. Nigeria, for example, suffers from a chronic infrastructure deficit that, according to some estimates, would cost $15 billion a year to plug. Yet, Danso points out, “of the $25 billion [in pension fund assets], not $1 million can be invested in infrastructure because of regulatory restrictions.”
Regulations aren’t the only factor limiting investment decisions. Shallow capital markets also hobble pension fund managers. Ghana is a case in point. Legislation in 2008 opened up pension funds to voluntary contributions and private trustee management, although implementation of the reforms didn’t begin until 2010. Today the country has 11 active pension funds, three of them owned by South African concerns, Fynn says. Collectively, the funds manage nearly $500 million in assets. “There are exceptionally favorable tailwinds,” says Doug Lacey, a partner with Mauritius-based LeapFrog.
The Ghana Stock Exchange lists just 37 companies, only 12 of which have a market cap of more than $100 million. The market’s total capitalization amounted to $3.9 billion at the end of last year, or roughly 10 percent of GDP. Ghanaian pension funds can invest a maximum of 10 percent of their assets in equities, but even that modest allocation can have a big impact on a thin local market. Last year the GSE Composite Index surged 78.81 percent. “Almost all of that was driven by pension funds,” explains Petra’s Fynn, who became frustrated by the limitations of the market and curtailed his purchases of equities. “It didn’t make sense for a lot of fund managers to chase the same stocks,” he says.
Although the pace has been uneven, countries across the continent are moving to ease restrictions on pension funds, and funds are beginning to shift their portfolios to reduce their dependence on fixed income. Investment strategies and asset classes won’t be transformed overnight, even in the most reform-minded countries. It’s still very early days, and even South Africa is experiencing some bumps on the road when it comes to certain investment classes, such as private equity.
Yet there’s a growing sense of inevitability that pension fund investments will broaden significantly, providing a big boost to African equities, public and private. The pace of diversification will accelerate as reforms broaden the range of investment choices and a young generation of professional fund managers propels the industry forward, executives say.
“The narrative is changing,” Danso says. “You’re hearing much more sophisticated investment vernacular in many African capitals” among economic planners and pension fund managers alike. But he hastens to add that radical investment change “doesn’t have to happen overnight — and it’s probably better that it doesn’t.”
Petra’s Fynn, 42, represents this new generation of fund managers. After earning bachelor’s and master’s degrees in engineering from the Massachusetts Institute of Technology and an MBA from Harvard Business School, he joined Boston-based Wellington Management Co., where he became associate partner. In 2008 the Ghanaian native found himself at a crossroads, feeling he needed to choose professionally whether to remain in the U.S. or return to Africa. “Whatever decision I made, I knew it would last for ten years or so,” Fynn explains. He decided to go back to Africa, initially taking a job as COO of Oceanic Capital Co., the investment bank subsidiary of Oceanic Bank International, a Nigerian lender later acquired by Ecobank. In that position he advised Oceanic Bank on entering the Nigerian pension fund market as a custodian.
In late 2009, after hearing about the changes in Ghana’s pension fund regulations, he decided to link up with another Ghanaian MIT grad, Chris Hammond, then CFO of a regional airline, Aero Contractors Co. of Nigeria. The two founded Petra in March 2011.
Petra now estimates it has about 20 percent of Ghana’s private pension fund assets, or roughly $100 million. The prospects for growth appear bright. Ghanaian regulations allow employees to make tax-free contributions to pension funds of as much as 35 percent of their income. With an incentive like that, predicts LeapFrog’s Lacey, private pension fund assets will grow tenfold in two to three years. He calls Petra’s managers exceptional.
South Africa offers the biggest and most obvious model for asset allocation by African pension funds. With a history that stretches back more than a century, the country’s pension funds loom over the continent in terms of size, reach and influence. That’s also true of the investments the funds make.
As South Africa dominates the continent, so Public Investment Corp. dominates South Africa. PIC manages the country’s largest pension fund, the Government Employees Pension Fund (GEPF), as well as the funds of 22 other public sector bodies, including South Africa’s unemployment insurance fund.
With an asset base that approaches the size of the $160 billion New York State Common Retirement Fund, PIC has an outsize impact on the South African economy. It holds approximately 13 percent of the market cap of the Johannesburg Stock Exchange. The fund manager is also the country’s single largest investor in commercial property, with real estate assets totaling R62.5 billion as of March 2013, the latest figure available.
More recently, PIC is taking the lead in investing outside its own borders. The fund has allocated R120 billion for international investment, of which half — the equivalent of $5.6 billion — is earmarked for Africa. That represents one of the biggest capital allocations in Africa aside from multilateral lenders and global mining companies. The sum is “almost double the amount of private equity money in the entire continent,” Elias Masilela, who served as PIC’s CEO until May, told Institutional Investor earlier this year. Helios manages the single largest pan-African private equity fund, with $900 million raised in 2011. It is currently raising money for a new fund, which it hopes will exceed $1 billion.
So far, PIC has announced four large direct investments that total more than $1 billion. In addition to its holding in Ecobank, in 2012 the fund paid R2.4 billion (then worth $275 million) for a majority stake in Tanzania’s Tanga Cement Co. Last year PIC invested $289 million in Dangote Cement, the largest listed company in Nigeria.
The latest and most controversial cross-border investment came in February, when PIC paid $270 million for a 30 percent stake in CAMAC Energy, a Houston-based company that explores for oil and gas in Nigeria, Gambia and Kenya. At the time of the agreement, CAMAC — majority-owned by Nigerian businessman Kase Lawal — was valued at only $150 million and losing money. The deal hinged on a listing on the Johannesburg Stock Exchange.
In late May, PIC announced that Masilela was resigning, with immediate effect. No reasons were given, and local media speculated about everything from the CAMAC investment to a cabinet reshuffle to an ongoing power struggle between Masilela and the fund’s politically connected CIO, Daniel Matjila. Matshepo More, the fund’s CFO, was named acting chief executive.
PIC has declined to comment on the management change. Masilela and Matjila didn’t respond to requests for comment.
Although the reason for the resignation remains murky, industry executives believe the changes will not alter PIC’s strategy of international diversification. They point out that the decision to make direct investments across borders reflects the priorities of GEPF and the South African government as much as it does those of PIC. President Jacob Zuma and other top officials have repeatedly stated their desire to see South Africa become the hub for investment activities across the continent.
“The departure of Elias might change execution a bit, but I don’t think it will change investment decisions at all,” says Sandile Sokhela, a principal at Cape Town–based Inspired Evolution Investment Management. “In general, investors in South Africa are going outside the country to invest, so PIC’s [African] investments are not surprising at all.”
Other South African pension funds are likely to follow PIC’s lead in investing abroad, according to Sokhela and other money managers. “PIC now has a mandate,” says Walé Adeosun, founding partner and chief investment officer at Kuramo Capital Management, a New York–based fund of funds firm that focuses on Africa. “There are other African pension funds that are looking, and eventually we will have something similar to what PIC is doing.”
Under a 2011 revision of South Africa’s Pension Funds Act, as much as 25 percent of the assets of any fund can be invested offshore, and a total of 10 percent can be allocated to private equity. Those limits don’t apply to the GEPF because the Finance Ministry supervises the fund and has final say, but the law serves as a reference point.
In an interview shortly before he resigned, Masilela, 50, explained the fund’s international strategy. In Europe and North America, PIC invests in equity indexes — which represent 3 percent of the firm’s assets — using BlackRock as its manager. Masilela said PIC intends to search for other managers as it grows its holdings. The fund manager will also consider direct unlisted investments in the so-called BRIC nations of Brazil, Russia, India and China.
According to Masilela, PIC has invested or agreed to invest about R30 billion, or half its nondomestic African allocation, on the continent. The fund has a three- to five-year timetable for deploying the rest of that allocation, he said. “If we are able to invest all these funds within three years, we can go back to the Government Employees Pension Fund and ask for a top-up,” he said. “It’s going to be a function of how quickly we find the deals and how quickly we execute.”
PIC believes that by taking a leadership role in branching beyond South Africa, it can demonstrate the benefits of investing across Africa to other private sector investors as well as pension funds in South Africa — a process Masilela called a “crowding in” of capital.
Money managers across the continent expect private equity to play a significant role in pension fund investments, either as advisers or — more likely outside South Africa — as general partners. Private equity “will provide the comfort level [pension funds] require,” Adeosun says.
In Nigeria, says Sart Partners’ Ahmed, “pension funds are growing massively, and the equities market won’t be able to absorb that kind of money,” so funds will increasingly turn to unlisted investments. But he contends that rather than investing directly, “pension fund managers are going to go through the route of limited partners, investing in a lot of private equity funds.”
Botswana provides the most liberal regime, allowing pension funds to invest as much as 70 percent of their assets offshore. Most funds take advantage of this freedom to invest in a mix of global equities and bonds. Because the local equity and bond markets lack depth, private equity, infrastructure and other alternative assets can provide vehicles for domestic investment and will be a “big focus for the country as the industry develops,” asserts Afena Capital’s Ndzinge. “There is going to be a massive pool of capital,” he says. “Naturally, we would like to keep it at home.”
Ibrahim Sagna is managing partner of Seychelles-based investment holding company Century Capital Holdings and a senior adviser to the Rwandan government. He cites as noteworthy two recent investments by the Gabon Strategic Investment Fund, a sovereign wealth fund with about $1 billion in assets. In mid-May the Central Africa Growth Sicar fund, through its manager, Emerging Capital Partners, announced it had sold its minority stake in Oragroup, a regional bank backed by ECP, to the Gabon fund. Terms weren’t disclosed. One day later GSIF said it was investing in IHS Towers, a private-equity-backed Nigerian provider of mobile telecommunications infrastructure. Again the price and size of the stake weren’t disclosed.
“That’s just the beginning,” Sagna says. “If [African] sovereign wealth funds invest in African companies, that brings us one step closer to other pension funds following PIC’s example and becoming active.”
In turn, Sagna and others believe, a growing African pension fund industry will spur Western pension funds to make investments in Africa. “If pension funds on the continent invest in the continent, they will act as a catalyst for investments from global pension funds,” says Africa Investor Group’s Danso.
At Ghana’s Petra Trust, Fynn says pension funds are at an inflection point. In two years, he predicts, there will be “significant product innovation.” Over time, he continues, Ghana’s pension funds will resemble those of South Africa. “We have an opportunity to make a real difference,” he says. • •