African institutional investors are making great strides in improving their investment strategies and are implementing important changes that will benefit their beneficiaries and support regional economic growth.
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We should never make the mistake of looking at Africa as a single country. It’s such a diverse continent comprising 54 countries, with a land area big enough to fit Europe, the USA and China combined. However, uncertainties are rife across the continent: the Covid-19 outbreak is far from over as new variants emerge and vaccination rates remain low. And, like many other parts of the world, the economic impact of the pandemic meant that over three-quarters of African countries experienced recession last year1.
GDP growth rates in African Countries in 2020
But there’s good news. The continent’s pension funds, sovereign wealth funds and other institutional investors with long-term horizons have played pivotal roles in bolstering performance, reducing investment risk and driving growth and prosperity across Africa over the last decade. They will (hopefully) also continue to generate positive investment outcomes for their beneficiaries and partner with their regional peers, governments and overseas co-investors. This strong collaborative effort should help improve local economies and mitigate the impact of the current Covid-19 crisis and beyond.
The assets in African pension funds are still relatively small, in global terms. However, the fast pace and positive direction of recent regulatory reform in some African countries have led to consistent growth in portfolio sizes, enhanced security of retirement benefits, stronger cashflows to pay pensions, and greater development of the continent’s economy and capital markets. The introduction of a basic safety net or retirement income across many African countries, and further introduction of private pension funds over recent years, should continue to improve pension coverage amongst individuals, and increase asset growth within the continent’s pension industry. Most African local pension funds have weathered the recent Covid-19 storm due to limited exposure to public equities and corporate bonds. For example, in Nigeria, with the second-largest African pension fund assets under management, the limits for public equities range from 5% to 30% (depending on the type of pension fund). So, their pension portfolios were shielded somewhat from the market volatility experienced by other pension funds in developed economies.
Largest pension fund sectors by Assets Under Management (AUM) in Sub-Saharan Africa
Source: World Bank
Looking to the future, some pension funds, in tandem with development finance institutions and banks, will be helping governments in their regions to respond better to the impact of the Covid-19 crisis. For example, in Ghana, the government recently introduced the Coronavirus Alleviation Programme (CAP) which is partnering with pension funds to create guarantees and first-loss instruments. In Kenya, a similar proposal aims to encourage pension funds to defer yields on their investments in local government securities and reinvest interest payments due for up to two years.
Pension funds are now investing in more long-dated assets. In South Africa, draft amendments to the pensions regulatory regime (Regulation 28) were published in May this year which would allow retirement funds to invest up to 45% of their assets in infrastructure. This should open a huge potential source of funding for domestic infrastructure projects, enabling them to support the recovery and resilience of the South African economy. And, according to the OECD2, increasing public infrastructure investment in, for example, South Africa, would be key to boosting economic growth, especially in transport infrastructure.
Long-term illiquid investments, such as infrastructure, private debt, and real estate, offer direct advantages to African pension funds: more diversified portfolios, bolstered returns (relative to local government bonds) and stable cashflows to pay retirement benefits. That is how some of the world’s largest pension funds, including those in Australia and Canada, have been operating – proactively investing in UK, and other overseas, long-dated illiquid assets.
Sovereign wealth funds
Except for the Libyan Investment Authority, whose $65 billion in assets are still frozen under international sanctions, Africa’s state-owned sovereign wealth funds (SWFs) are relatively small. Their total assets under management of $24 billion, across 13 funds in 20203, pales in comparison to their global peers. According to the Sovereign Wealth Fund Institute, this year, the top 10 SWFs in Europe, the Middle East and Asia total around $6.4 trillion. Therefore, African SWFs do not yet have the scale to have a significant impact in the way they would like.
Largest SWFs worldwide, by AUM
Source: SWF Institute, February 2021
However, they aren’t resting on their laurels. While there’s more work to do, they are punching above their weight: working hard to strengthen and improve the transparency of their governance structures and meet their socio-economic needs. In particular, similar to some African pension funds, SWFs are combining their efforts to stabilise and stimulate their economies through:
- Attracting more capital from their governments (eg revenues from their natural resources and commodity exports),
- Seeking strategic partnerships with international co-investors that have long-term investment horizons, and
- Investing in an array of long-dated illiquid assets, such as infrastructure projects, private equity funds, real-estate developments, and so on.
Thanks to a supportive regulatory environment in most African countries, and a desire to think differently and work together, the outlook for pension funds, sovereign wealth funds and other institutional investors on the continent is positive. While more work is needed to encourage further changes in local investment policies, there is a change in mindset and behaviour amongst these investors across the continent. This is bolstering African economies and societies by boosting investment returns in order to help their nations build a resilient recovery and emerge stronger from the Covid-19 pandemic.