Private equity looks to African investors

Africa's pension funds hold billions of dollars which could be invested for job creation and economic development.

Fundraising by Africa-focused private equity has rebounded after the global financial crisis, buoyed by support from the international development finance institutions. Now, the industry hopes to unlock billions of dollars held in African pension funds to dramatically increase the resources available for investment.

Some international investors have found private equity an effective way to gain exposure to Africa's fast-growing economies without having to use the continent's under-developed public markets, which often suffer from weak financial infrastructure and thin liquidity. Development finance institutions have seeded new funds in the hope that their investments will drive job creation, as well as helping funds to build a track record and attract more private capital.

In African countries where banks often charge high interest rates and financial intermediation is limited, private equity can play an important role in enabling corporates to grow.

"In some of the big economies like Nigeria [lending to the private sector] is maybe 16 per cent of GDP, whereas in Brazil that's 80 per cent, China it's 140 per cent," says Mike Casey, director of consulting services at the Emerging Markets Private Equity Association (EMPEA). "These non-bank finance institutions are providing capital for a lot of businesses."

The funding gap in African economies has been exacerbated by deleveraging amongst European banks, who have cut their exposure to African corporate debt, Casey says.

With capital to expand, successful businesses create jobs. Research by the International Finance Corporation, (IFC) cited by Casey, shows a direct correlation between the internal rate of return (IRR) of funds — a measure of their financial success — and job creation. The IFC showed that amongst its top 10 performing funds, on average they had an IRR of 30 per cent and created 17,500 jobs.

Many in the industry hope that this development impact will encourage African pension funds to allocate capital to the asset class. Pension funds in 10 of the largest economies south of the Sahara have a total of$380 billion in assets under management, but are currently constrained by regulations that limit their ability to invest in so-called 'alternative' assets, such as private equity.

Although pension funds are naturally cautious, some have seen their assets bolstered by their countries' economic growth, meaning that they are struggling to find ways to invest, Casey says.

"Their asset base is growing rapidly but they're running out of places to put it. There is a dearth of products available. So both in terms of diversifying their portfolios and achieving returns, they need to find other outlets for it. That naturally leads to private equity as one vehicle to do so."

The necessity to boost returns above those offered by government bonds or equities may also become more acute, says Nathan De Assis, executive director of Equity Capital Resources, a Lusaka-based private equity and venture capital firm.

"We know that Europe and the rest of the Western world has had to adjust the retirement age because they're running out of money to pay the pensioners," he says. "Because people (in Africa) are beginning to live well, therefore they will live slightly longer, therefore the obligation on the schemes is going to be higher."

De Assis believes that private equity could play a major role in balancing these longer term liabilities. "As long as the managers manage it from a fiduciary responsibility perspective and they don't become reckless," he says. "Because this is other peoples' money."