South African Pension Giant Expands Portfolio Across Africa

In mid-March the board of directors of Togo-based Ecobank Transnational ousted CEO Thierry Tanoh over allegations of mismanagement. The leadership change wasn’t hatched at the bank’s headquarters in Lomé, though, or in nearby Nigeria, its largest market. Instead the demand for change was led by Public Investment Corp. (PIC), the South African pension fund that is Ecobank’s biggest shareholder.

African companies will have to get used to PIC’s influence. The $135 billion-in-assets institution, which manages South Africa’s largest pension fund and until recently was a predominantly domestic investor, is ramping up its activities across the continent, and it doesn’t hesitate to make its views known.

PIC has a responsibility to exercise “moral suasion” across the African market, the fund’s CEO, Elias Masilela, tells Institutional Investor. By taking a leadership role in branching out beyond South Africa, he explains, PIC can demonstrate the benefits of investing across Africa to other private sector investors and pension funds in South Africa, a process he calls the “crowding in” of capital.

Pretoria-based PIC acquired a 20 percent share of Ecobank for $250 million in 2012. It was the fund’s first investment on the continent outside South Africa and a baptism by fire. In 2013 Ecobank’s executive director of finance and risk claimed that Tanoh, in connivance with a former chairman, Kolapo Lawson, was attempting to sell bank assets below market prices and to write off a loan to Lawson. Tanoh denied the allegations, but he infuriated directors by awarding himself a huge bonus and failing to raise capital, as he had promised to do.

Although Nigeria’s Securities and Exchange Commission began investigating Tanoh in early 2013, things came to a head only earlier this year when PIC began to publicly criticize the CEO. In March PIC’s chief investment officer, Daniel Matjila, sent a letter to the bank’s interim chairman demanding Tanoh’s resignation; he cited a laundry list of grievances, including misleading shareholders and the board, and called him “technically and immorally unfit,” according to press reports.

PIC hasn’t hesitated to assert its views at some of the South African companies it holds stakes in, but such activism is rare elsewhere on the continent. Masilela spoke a few days before the boardroom coup, but he made clear that the pension fund was determined to expand its portfolio across Africa and, if necessary, to use its financial clout to effect change.

In 2010 PIC earmarked 120 billion rand ($11.6 billion) for international investment, of which 60 billion rand was to be invested in the rest of Africa. PIC is about halfway toward its goal, having already invested or agreed to invest about 30 billion rand on the continent.

PIC, which manages assets mainly for the Government Employees Pension Fund, is working on a three- to five-year timetable for allocating the entire amount, Masilela says, but that’s flexible. “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. It’s going to be a function of how quickly we find the deals and how quickly we execute.”

The fund’s foray into other African countries is being closely watched, and for good reason. PIC’s investment budget represents one of the biggest capital allocations in Africa except for multilateral lenders and global mining companies. By comparison, Helios Investment Partners manages the single largest pan-African private equity fund, with $900 million raised in 2011; it is currently raising money for a new fund it hopes will exceed $1 billion.

Other institutions are scrutinizing PIC’s strategy with an eye on starting or increasing their own Africa investments, possibly in concert with PIC.

“You’ll see more and more of these coming up,” predicts Sandile Sokhela, a principal with Inspired Evolution, a Cape Town–based investment management firm. Pension funds feel a need to diversify investments geographically, he says, and asset manager advisers in South Africa are increasingly comfortable promoting the trend because of the rapid growth in many African markets.

It’s not clear how quickly this will happen or how much money will be involved. Some money managers, like Sokhela, believe most South African pension funds are merely looking to test the waters rather than placing aggressive bets. Masilela identifies Eskom Pension and Provident Fund — the country’s second-largest pension, which invests on behalf of employees of the power company Eskom Holdings — as one that will follow in PIC’s footsteps. However, Eskom itself is now struggling with power shortages, slowing revenue growth and a management shake-up. Given those issues, the company’s pension fund isn’t likely to do anything adventurous in the near term.

Investing outside South Africa is grounded in some simple economics. Growth in many African nations is running at a pace of more than 5 percent, whereas South Africa’s gross domestic product expanded by just 2 percent last year; the rate is expected to remain subdued this year. “There’s a lot of new interest in the rest of Africa, simply because the rest of Africa is growing so much faster than South Africa,” says Alex-Handrah Aimé, who heads the Johannesburg branch of Washington, D.C.–based private equity firm Emerging Capital Partners.

Even by global standards, PIC is enormous. Its assets under management at the end of March 2013, the most recent figures available, were nearly 10 percent greater than the $124 billion Teacher Retirement System of Texas.

In Africa the century-old PIC is by far the continent’s biggest pension fund manager and its institutional investment giant. It has an outsized impact on the South African economy, holding approximately 13 percent of the market cap of the Johannesburg Stock Exchange.

The South African government has proclaimed that it wants the country to become the continent’s center of regional investment.

Be that as it may, PIC is somewhat circumscribed by its unique structure when it comes to spreading its wings beyond its borders. The government-owned firm manages funds for 23 different public sector bodies, including the country’s Unemployment Insurance Fund, but almost 90 percent of its assets comes from the giant Government Employees Pension Fund, or GEPF.

Under a 2011 revision of South Africa’s Pension Fund Act, up to 25 percent of the assets of any fund can be invested offshore and up to 10 percent in private equity. In the case of GEPF, those limits aren’t binding because the Finance Ministry supervises the GEPF. However, the law serves as a reference point, says Masilela.

“When the decision was made to invest offshore, there was a need to go to government for approval,” Masilela explains. “The minister of finance approved 10 percent in total. In terms of that 10 percent, half of that can be invested in the rest of the African continent. The other half needs to be invested outside of Africa, the rest of the world.”

In Europe and North America PIC invests in equities indexes — which represent 3 percent of the firm’s assets — using BlackRock as its manager. Masilela says PIC will search for other managers as it progresses. The fund manager will also consider direct, unlisted investments in the so-called BRIC nations of Brazil, Russia, India and China. (South Africa joins with that group to form the BRICS bloc.)

Masilela expects that PIC will devote the bulk of its African allocation to private equity because of the shallow nature of public equities markets in the region. “Do a comparison between all the exchanges in the rest of the continent on one side and the Johannesburg Stock Exchange on the other,” he notes. “The African-listed market would account for less than 20 percent of the JSE.” PIC will pursue a “dual path” on the continent, investing directly in some cases and working through third-party asset managers in others, he adds.

Since embarking on its Africa strategy two years ago, PIC has announced just three investments so far, and all are direct: the stake in Ecobank; a $289 million investment in Dangote Cement, the largest listed company in Nigeria; and a 2.4 billion rand stake in Tanzania’s Tanga Cement Co. “They’re tiptoeing their way,” says Emerging Capital Partners’ Aimé.

PIC doesn’t have the capacity to adequately screen potential investments on a continent that stretches some 5,000 miles and encompasses more than 50 countries. So the pension fund is negotiating with asset managers to act as advisers and, in some cases, as co-investors. “An initial batch of between four and six managers” has been identified, Masilela says, although he declines to name them. Masilela didn’t rule out acting as a limited partner in a private equity firm, but that kind of investment “isn’t a priority for us,” he adds.

To help identify and evaluate assets, partnering with private equity firms with demonstrated expertise outside South Africa appears necessary if PIC is serious about expansion. Emerging Capital Partners, for example, has seven offices across Africa. It has more than $2 billion under management and has invested in more than 50 companies, and exited 28.

“The way pension funds are set up structurally — and given management capacity — it will be difficult to go it alone,” Aimé says. “They are not going to be able to cover 54 countries or even the largest ones in significant depth. It is difficult for any investor to show up a couple times a year and expect to really understand what is going on in the local markets or to navigate the local dynamics in a way that allows them to invest appropriately.”

In South Africa PIC will invest as little as 60 million rand in an individual company. At least in the initial stages, investments in other African countries will be substantially larger. That reflects a more problematic terrain. “Purely from the economics of finding the project, due diligence and the like, it does not make sense to invest in small projects on the continent, because that exercise is much costlier than investing in South Africa,” Masilela says.

PIC has identified certain broad areas for investments in Africa, a strategy that sounds more like that of the World Bank than the California Public Employees’ Retirement System. Masilela talks of a “developmental investment strategy” by which the commercial aspect of an investment must be married with the larger goals of economic growth and employment generation. Infrastructure will be one emphasis. Masilela defines this as “large public works” including roads, ports and pipelines.

Whereas Masilela stresses that PIC is a long-term investor, the fund has a well-defined exit strategy. The first preference will be to sell out to what he termed “domestic entrepreneurs.” A public offering is the second choice, but that involves strengthening capital markets around the continent — no easy task. Masilela said PIC is partnering with the Johannesburg Stock Exchange to assist in that effort.

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