Pension funds can be a catalyst for solving Africa’s financing crisis

Encouraging capital allocators to deploy or increase deployment of capital in Africa is a challenge.

03 MAY 2024–by ABI MUSTAPHA-MADUAKOR

Africa requires $2.8-trillion, equivalent to 93% of continental GDP, in funding by 2030 to meet countries’ nationally determined contributions as outlined by the Paris Climate Agreement. The urgency of Africa’s response to the climate crisis is compounded by demands for regional integration and increased infrastructure spending to meet the $100bn-plus annual infrastructure funding gap.

The continent is home to abundant sources of capital, but encouraging capital allocators to deploy or increase deployment within the region is a real challenge. Sub-Saharan Africa’s pension funds sit on about $350bn of assets, with a large portion of capital yet to be deployed to alternatives.

Accessing capital from pension funds will continue to rise in strategic importance over the coming years. For the continent to harness the region’s demographic dividend economies must create 2-million additional jobs annually. Supporting a young, ambitious population will require more than enabling a new generation of micro-entrepreneurs. Formal employment opportunities at scale will be necessary to help broaden the tax base for fiscally constrained governments, and this will also support pension contributions.

With pension funds in the six largest Sub-Saharan African markets projected to grow to $7.3-trillion by 2050, pension funds are a formidable source of capital to finance the continent’s transformation. Combined with the growth of available investable capital, the time frame between initial contributions and pension payout supports a strategy of patient capital allocation.

Pension funds with long-term liabilities are well positioned to leverage the benefits of private equity and private debt. These asset classes are essential for funding projects that require extended terms, such as major industrial projects, including manufacturing facilities, industrial parks, ports, airports or railways.

Trepidation

Pension fund managers often cite regulatory hurdles as one of the impediments to their investments in Africa. However, even where regulation does encourage greater investment allocation to alternative asset classes has remained significantly below its potential.

Beyond this, the perceived risk profile of alternatives, partly attributable to a nascent understanding of asset classes such as private equity, debt and infrastructure — combined with low-risk investment strategies influenced by their fiduciary duty to pensioners — limits private capital investments. Limited participation has then held back the development of the technical expertise required to make successful investments.

A comparison of Africa’s pension fund allocations with other regions globally reveals the potential gap to be filled. Even in SA, one of Africa’s most developed pension markets, alternative assets comprise 8% of pension fund investments, compared with 18% in Europe and 24% in the US. While pension funds globally invested $211.8bn in infrastructure in 2021, Africa’s contribution accounts for a mere fraction of the figure. Putting the continent’s capital to work requires a seismic shift in capital deployment strategies.

Improved engagement and alignment between pension fund managers and fund managers is essential to further unlock this capital. For over 20 years the African Private Capital Association has focused on strengthening relations between allocators and fund managers and has been actively engaged in advocacy to enable policies supporting the investment landscape and help increase allocations.

The association’s academy was designed to address the capital building gap in the industry. It delivers industry-leading training to equip African pension funds with knowledge, tools and networks to support their participation in an evolving financial landscape to make more informed, strategic investment decisions for the benefit of their stakeholders.

Strength in numbers

This shift is under way. In SA, amendments to Regulation 28 of the Pension Funds Act have enabled more significant allocations to critical infrastructure. Bringing pension funds together into a consortium has helped pool efforts to expand technical and financial resources. The Asset Owners Forum of SA launched in 2021 with 15 founding members, all among SA’s top 20 largest pension funds. Members of the forum have more than $160bn in combined assets under management.

The Kenyan Pension Funds Investment Consortium was launched in 2020 with support from international organisations, growing from five to 24 members that collectively manage over $5.2bn in assets. Kenya and SA’s pension fund consortia have unleashed more than $500m in new infrastructure finance in just three years.

Backing ourselves

We’re now seeing Africa’s pension funds investing in landmark initiatives, such as Africa50’s Infrastructure Acceleration Fund, which recently reached ​​its first close with $222.5m, securing commitments from mostly African institutional investors.