As Africa struggles to bridge the financing gap required to sustain its rising population, Raju Jaddoo, Non-Executive Director of Ocorian AMEA, sheds light on the change in strategy of African pension funds and how it may stimulate the alternative investments markets in Africa.
The demographic dividend in sub-Saharan Africa provides pension funds with a window of opportunity to rethink their portfolio strategy
At the recently concluded Pension Funds & Alternative Investments Africa conference held in Mauritius, industry experts and asset managers from several African countries discussed the major challenges and opportunities facing the continent in the area of pension funds. A conservative estimate is that pension funds in the six largest sub-Saharan African countries will see their assets grow from USD 600 billion in 2020 to almost USD 7 trillion by 2050.
With more young members currently contributing and the lower ratio of beneficiaries, there is no urgency to prioritise short-term liquidity from investments as long as the continent will benefit from this demographic dividend. It is expected that the bulk of current contributing members will become beneficiaries in approximately 10 to 20 years. This situation paves the way for a shift from traditional investment in bonds and other fixed income instruments, to private equity programs over longer periods.
With recent changes in the respective domestic investment policy landscape allowing major pension funds to increase their allocation outside of their frontiers and venture beyond the traditional asset classes, there are more opportunities than ever before for fund managers operating in the alternative investment space to play a key role in intermediating such flows.
The New Partnership for Africa's Development (NEPAD) 5% Agenda will see allocation of pension funds' assets under management to African infrastructure increase to 5%
This trend is being further supported by the African Union Heads of State through the endorsement of the NEPAD 5 % Agenda, which aims to bridge Africa's $68 billion infrastructure finance gap. Through this initiative, African pension funds are encouraged to allocate 5% of their assets to financing the continent's infrastructure, from what is currently a low base of approximately 1.5%.
The initiative also seeks to address the normal impediments blocking institutional and other long-term investments in Africa's infrastructure. To remedy the situation, NEPAD Agency is also working on an African Infrastructure Guarantee Mechanism alongside other regional multilateral development financial institutions. The recent visit of major US pension funds and asset managers to Southern Africa to explore co-investment opportunities with their domestic counterparts is a major step towards attracting foreign institutional funds into the region.
Pension funds in Europe with allocation to Private Equity have outperformed pension funds with no allocation to that asset class
Driven by the search for returns in a low global return environment, alternative asset classes such as hedge funds, real estate, infrastructure and private equity are increasingly being looked at as they also offer relatively uncorrelated and superior risk-adjusted returns, if the illiquidity tolerance is reasonably low. Pension funds in Europe with allocation to Private Equity have outperformed pension funds with no allocation to that asset class as per Invest Europe's publication 'Guide to Private Equity and Venture Capital for Pension Funds'. With increasing volatility, portfolio construction is key as the traditional multi-asset approach evolves towards a multi-strategy framework involving defensive and uncorrelated assets.
With asset protection remaining paramount in the hunt for yield, governance and manager selection are key to ensuring long-term asset growth with the ability to impact the real economy. The Government Employees Pension Fund of South Africa, among the largest on the continent, has a developmental investment policy in place that seeks to make investments for developmental impact as well as for returns, with clearly identified areas where they can make a real difference to job creation and poverty alleviation.
The growing interest of pension funds in non-traditional asset classes will no doubt further stimulate the investment landscape in several parts of the world. Not least in Africa where pension funds, in their choice of asset class, are poised to upscale their contribution to economic growth.
Originally published 22 May 2019
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