To the east, a group of East African pension funds agreed to launch a joint fund to invest in local small business, private equity and venture capital funds. To the west, pension funds are championing a minimum allocation for such alternative assets.
The push from Africa’s institutional retirement plans to increase their capital allocations to homegrown businesses and fund managers is a remarkable change in tune. Most of African pension funds’ $700 billion or so in assets under management is invested in listed government bonds; less than 1% of this capital is invested in private equity or venture capital.
“It’s a good starting point, because at least the pension funds are putting their trust into alternative funds,” commented Patrick Herrmann of AfricInvest, a pan-African multi-asset investment firm. About 20% of investments so far in AfricInvest’s latest fund are from African pension funds.
“There’s much more capital that can be mobilized in that area,” he told ImpactAlpha on the sidelines of the All Africa Pension Summit, hosted earlier this month in Kampala by Ugandan pension fund manager NSSF.
NSSF Uganda has been a key driver in engaging and educating its institutional peers on the continent about opportunities to invest in small businesses, local startups, private equity funds and other alternative assets driving Africa’s economic growth. The organization sees alternatives as key to its own growth strategy: supporting local growing businesses that create local jobs builds new retirement savers. It has invested in more than 430 early-stage businesses and ventures in the past five years through its Hi-innovator program. Those companies have in turn brought more than 2,000 new members and contributions of two billion Ugandan shillings (about $550,000) to NSSF Uganda.
“Knowing what we know about entrepreneurship and its potential to create employment, why have we not gone the extra mile to promote venture capital as a catalyst of growth in Africa?” writes Patrick Ayota of NSSF Uganda in a new primer for pension funds on venture investing, which it launched at the summit with First Circle Capital.
“The primary fiduciary duty, to preserve and grow the savings of today’s pensioners, must be complemented by a broader developmental duty: to help create the economies from which tomorrow’s contributors will emerge. Allocating even a small portion of long-term assets to well-governed venture and private equity funds can achieve both goals,” argued First Circle’s Agnes Aistleitner Kisuule.
Exit strategies
On display at the summit were cases of pension allocations moving to VC funds, private equity, infrastructure and other assets—along with bottlenecks that prevent more capital flowing.
AfricInvest, for example, is a case study in pension funds’ growing interest in private equity firms — but ones with track records. The firm has invested over $2 billion in African businesses through 22 funds. In September, it reached a $58 million first close for its third financial inclusion fund, with backing from Central Bank of Kenya’s pension fund, among other pension investors.
The Central Bank of Kenya’s pension fund, for example, has backed two AfricInvest funds (see, “AfricInvest’s third French-African fund lands $58 million in its first close“). But so far it has only invested in foreign-managed private equity funds, CBK’s Jane Nzau said at the summit. She added that CBK would consider local funds that can prove they can make exits and return capital.
That favors international fund managers investing on the continent over African fund managers, many of which are raising their first or second funds.
“Liquidity is a general concern for African investors,” observed Herrmann. “We’ve invested in more than 200 companies and we’ve done more than 100 exits to make sure that we’re getting the capital back to our investors.”
One of the ways AfricInvest has done this is through an evergreen financial inclusion fund.
“The fund has a long-term horizon with the idea of making recurring distributions to our investors, which is an attractive structure for pension funds. They see various benefits compared to a closed fund structure,” he said.
CBK invested first in AfricInvest’s evergreen fund before joining its newest, closed-ended fund. The evergreen fund has also raised capital from the Kenya Power Pension Fund, KenGen Staff Retirement Scheme, South Africa’s Public Investment Corporation and several West African pension funds, which have backed other AfricInvest funds.
On ImpactAlpha’s latest Agents of Impact Call, fund managers emphasized the need for evergreen and non-traditional fund structures to prove that local vehicles can return capital in Africa.
“That’s the only way we can keep the money flowing toward our small businesses that are the majority of our private sector,” said Evelyne Dioh Simpa of Senegal-based WIC Capital.
Foreign-led
Cuts to overseas development assistance has been a major impetus for African fund managers’ increasing engagement with African institutional investors.
“We can’t continue relying on grants and donations,” said Edward Isingoma Matsiko of Pearl Capital Partners, a Kampala-based fund manager that invests in businesses in the agriculture sector.
But African investors are often reluctant to anchor alternative asset funds; for now, they tend to follow foreign investors.
Pearl Capital, which got its start in 2005 as an initiative of the Gatsby Charitable Foundation, the Rockefeller Foundation and Belgium-based Volksvermogen, secured its first pension backer, NSSF, in 2017. It was NSSF’s first local fund investment, said Matsiko; it backed Pearl’s €20 million Yield Uganda Investment Fund after Pearl had secured a €10 million anchor investment from the EU’s International Fund for Agricultural Development.
Without IFAD’s first-loss protections, Matsiko says, “I don’t think we would have been able to get the funding from NSSF, especially back then. There’s no way.”
Pearl has achieved three exits so far and is looking at making five more, by 2027 when the fund nears its end.
“The fund is performing as expected. Almost half of the money is already back to NSSF,” Matsiko said. “We’re hoping over the next three years to be able to fully exit with a small return, and once that happens, we believe and hope that the NSSF will be able to make a bigger impact.”
Outsized returns
Acknowledging the learning curve of alternative asset investing, William Nyaoke of Norfund called out examples of solid performance from the development finance institution’s own Africa portfolio.
Norfund has a joint investment company with Dutch pension fund KLP, KLP Norfund Invest, which in September backed Anthem, a 445-megawatt solar and wind project in South Africa. KLP Norfund Invest, or KNI, has also invested in CrossBoundary Energy, a commercial and industrial solar developer, and the Lake Turkana Wind Power project in Kenya, which it exited in 2023 after nearly 12 years.
“There’s this assumption that alternatives are meant to be risky because early-stage startups are what’s sold to [pension funds],” Nyaoke told ImpactAlpha. “If you’re investing pension fund money, the cost of doing something wrong is very high at a personal level, you could lose your job.”
He also argues that the risks of investing in emerging markets are overstated—as a growing body of data proves. Until investment emerging market opportunity risks are repriced, there’s potential for outsized returns relative to more advanced markets.
“If you’re a pension fund investing in treasuries in developed markets, you’re lucky if you get 5%,” said Nyaoke. KNI has made double digit returns on the emerging market deals it has exited, he noted. “That tells you why they’re willing to take that risk.”
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