Private equity is a major driver of economic growth, but institutional investors such as pension funds are traditionally wary of investing in it due to perceived risks. How can they be persuaded to grasp the opportunities that it presents?
When the veteran Kenyan politician Raila Odinga was named the African Union's high representative for infrastructure development in October, many viewed it as a cynical ploy by President Uhuru Kenyatta to get rid of his longtime rival.
The political opponents contested an acrimonious election last year which saw the incumbent convincingly win a runoff which Odinga's opposition boycotted. But after the fierce rivals settled their differences, Kenyatta paved the way for Odinga's appointment to the newly created role.
Yet Odinga's new job offers far more than a distraction from domestic politics. He has been tasked with mobilising political support for the Programme for Infrastructure Development in Africa, which aims to implement 51 cross-border projects focusing on energy, transport, water and ICT. A crucial part of that role will be to boost the participation of institutional investors, namely pension funds, sovereign wealth funds (SWF) and insurance companies, who could play a key role in bridging Africa's infrastructure funding deficit, estimated by the African Development bank to be between $68bn and $108bn a year.
The appointment comes as assets managed by African institutional investors are expected to grow to $1.8 trillion by 2020. Africa's pension fund assets were estimated at $372bn in 2017, according to investment consultant firm RisCura, with the vast majority of assets concentrated in South Africa, Nigeria, Namibia and Botswana. South Africa's Government Employees Pension Fund (GEPF), the largest pension fund on the continent and the seventh largest in the world, held assets worth more than R1.6 trillion ($110bn) in 2017.
Despite the huge pool of potential funds, most fund managers are naturally risk-averse and are reluctant to invest in unpredictable decade-long infrastructure projects which traditionally have long-term yield profiles. Investment vehicles such as private equity remain mostly off-limits to many SWFs and pension funds.
Nevertheless, the tide may be turning. NEPAD has launched its 5% Agenda to develop a concrete roadmap to increase the allocations of African institutional investors to African infrastructure. Pension fund participation in infrastructure has grown, led by South African funds, which are allowed to invest 10% of assets through private equity.
Development finance institutions (DFIs) have also launched a series of infrastructure funds and co investment platforms such as the AfDB's Africaso Infrastructure Fund. The fund aims to raise $10bn in total and has currently built a capital base of $850m. Some governments, meanwhile, have embraced innovative investment vehicles which cater to...