Ofei Kwafo-Akoto* highlights local regulations governing investment by African pension funds into private equity and considers the need for greater regional investment in this asset class.
At the 2014 Africa Development Forum, David Ashiagbor, of Making Finance Work for Africa, highlighted the growth of the African pension industry and the potential for domestic pension fund assets to become a significant source of private equity capital. The figures are certainly astounding – pension funds in the 10 largest economies in sub Saharan Africa have about $380bn in assets under management.
In a region characterised by economic growth, rising incomes and a growing population, it is no wonder that the African pension industry is expanding exponentially. However, over the years many commentators have highlighted the failure of local pension funds to effectively mobilise domestic resources. Industry statistics reveal that only $3.8bn -$5.7bn is currently invested in private equity.
Why does much of this long-term capital remain comparatively underutilised? Historically, a lack of regulatory reform was often cited as the key obstacle to pension fund investment in private equity. However, a review of some of the main regulatory developments in the region reveals a slightly more complex situation in which regulation represents only one of the factors that determines how pension fund capital is accessed and invested in the African growth story.
Since 2008, Nigerian regulators have taken steps to establish a legislative framework that allows local pension fund investment into alternative asset classes, including private equity. In 2010, Nigeria’s Regulation on Investment of Pension Fund Assets was amended to permit up to 5 percent of pension fund assets to be invested in private equity for the first time.
2011 saw key reforms to South Africa’s Pension Funds Act, with amendments to Regulation 28 of the Act which sets out the allocation cap for various asset classes. South African pension funds are permitted to invest up to 10 percent of their total assets in private equity (an increase from previous caps of 2.5 percent for investments in unlisted shares outside South Africa and 5 percent for unlisted shares within South Africa).
Under the Retirement Benefits Act 1997, Kenyan pension funds may invest up to a maximum of 10 percent of their assets in private equity funds through the ‘other’ asset category, subject to approval from the national Capital Markets Authority.
Looking beyond regulations
Regulatory developments in Africa are certainly moving in the right direction (the permitted allocations are broadly in line with the levels of investment seen internationally). However local pension funds continue to have limited exposure to private equity – the top ten African pension funds have approximately $29bn of uninvested capital that is available (under current rules) for investment in private equity.
It is clear that there are factors other than regulatory limits that inhibit pension fund investment into private equity. One major barrier is a lack of understanding of private equity and an unfamiliarity with the asset class amongst pension fund trustees. Pension fund administrators also cite the private equity ‘J curve’ and the illiquidity of the asset class (as compared to listed securities) as further hurdles to investment.
Whatever the perceived barriers, the overall case for greater private equity investment is a strong one: in addition to higher performance premiums and diversification benefits, private equity allows African pension funds to make a greater contribution to economic development on the continent through investments that promote job creation and improve governance standards whilst tapping into the growth of unlisted, local businesses.
In addition to regulatory reform, a greater understanding of private equity will be key for change in this area, and although development finance institutions such as the World Bank have established initiatives aimed at educating pension fund administrators, it remains to be seen whether this will result in pension funds playing a greater role in Africa’s private equity market.
*Ofei Kwafo-Akoto is a UK-based lawyer focussing on corporate matters including M&A and private equity transactions in Africa.