Local investors key to closing financing gap
Local companies can reap tremendous benefits by targeting early-stage companies before they become too expensive. PHOTO | FILE | NMG
What you need to know:
Local institutional investors should recognise that their long-term liabilities are particularly well suited to PE.
The asset class diversifies their portfolios, provides protection against downside risk and, additionally, means they don’t have to worry about exchange rate risk.
African investors are gradually turning to private equity (PE) and venture capital (VC) but greater momentum could turbocharge both the ecosystems, supporting entrepreneurs and creating jobs.
African Private Equity and Venture Capital Association’s latest figures show the value of African PE fundraising in 2013-2018 as $17.9 billion. Yet only a small proportion of this capital is local, with the majority coming from development finance institutions and international pension funds.
CAPITAL FLAWS
African pension funds have a vast pool of cash — $372 billion, according to the latest figures from RisCura. In Kenya, pension funds’ allocation to PE and VC have grown rapidly since the 2016 reforms capped allocations to the asset class at 10 per cent. Retirement Benefits Authority’s latest numbers show there has been an encouraging year-on-year growth in pension fund managers’ and trustees’ allocations to PE, which now total over Sh1 billion.
But at just over one per cent of total pension assets, this is a drop in the ocean — and significantly below the 10 per cent cap. This is mirrored in African markets like Botswana, Nigeria and South Africa.
What can be done to catalyse capital flows following regulatory changes?
The solution is education: African institutional investors — including insurance companies, which have assets of just under Sh500 billion in Kenya, according to the World Bank — are often sceptical of PE as an asset class and typically don’t understand its risk-return profile, preferring instead less risky fixed income products.
Fixed income instruments can be attractively safe, predictable bets and PE can seem less predictable and, perhaps, harder to sell to a typically conservative board of trustees. However, local institutional investors should recognise that their long-term liabilities are particularly well suited to PE. The asset class diversifies their portfolios, provides protection against downside risk and, additionally, means they don’t have to worry about exchange rate risk.
FUTURE CUSTOMERS
Additionally, allocating to PE can bring about significant environmental, social and governance improvements with these being areas of growing concern for millennials, the pension industry’s future customers. Moreover, by deepening their ties to local PE firms, institutional investors can potentially open up co-investment opportunities.
There are signs that we are making progress. These are nascent developments, but more and more Kenyan pension funds are making allocations to the PE sector. The formation of a consortium by 10 large Kenyan pension funds to invest in infrastructure projects last September is a significant development that will bear fruit.
We have also witnessed the slow, but encouraging, growth of corporate venturing against a backdrop of exponential growth in the sector. This is particularly interesting because it solves two key challenges: Instilling innovation within large companies that often struggle to adopt new technologies while allowing serious entrepreneurs to grow their businesses to scale and secure large-scale adoption.
Local companies can reap tremendous benefits by targeting early-stage companies before they become too expensive.
Ms Essomé is the CEO, African Private Equity and Venture Capital Association (AVCA). [email protected]
