"Africa's growing pension funds, resulting from the rise of the middle class, are increasingly a source of capital for private equity fundraising."
In the context of continued global economic instability, the strength and attractiveness of the African private equity market has never been more evident. According to 2011 Preqin statistics, there is increasing interest among investors for Africa-focused private equity funds. In 2011, private equity funds in sub-Saharan Africa raised over $1.3bn, a marked increase from $964m raised in 2009.
However, despite the significant increase in fundraising since 2009, African private equity markets remain underfunded. Between 2005 and 2011, sub-Saharan African private equity funds raised $11.0bn, while they invested $12.3bn, according to EMPEA statistics. In contrast, Emerging-Asian (ex-JANZ) private equity funds raised $159.6bn and invested $139.7bn during the same period.
What this suggests is that sub-Saharan Africa presents greater investment opportunities for capital than can be fulfilled by the capital raised, highlighting Africa's potential as a prime investment destination.
In light of this, African fund managers are increasingly looking to expand and diversify their sources of funding and take advantage of local pools of capital. Africa's growing pension funds, resulting from the rise of the middle class, are increasingly a source of capital for private equity fundraising.
As we're already beginning to see, domestic institutional capital in Africa is starting to play a more prominent role in private equity, increasingly outside of the home country of the institutions. For example, in Nigeria, the Contributory Pension Scheme (CPS) has grown to $13bn assets under management. In a further indication of growing support for PE investments, South Africa's Regulation 28 (governing pension fund investment) was amended in December 2011 to allow a doubling of the permitted allocation to private equity from 5 percent to 10 percent.
These changes in regulation and the investment mandate of both government and corporate pension funds are broadening the investment landscape and represent a significant opportunity for private equity. Given the continued instability of global markets and the long term nature of young African pension funds, the asset class presents an appealing investment opportunity.
The significant performance premium and diversification benefit of private equity funds can be captured by long term savings vehicles such as pension funds that are able to properly manage the long investment term and limited liquidity of private equity investments. African countries are increasingly looking to tap into the growing wealth and prosperity of their citizens to harness the demographic trends that much of the continent is experiencing.
Equally significant, private equity investments can provide African pension funds with access to a broad sector diversification not necessarily obtainable on the local stock exchanges - which continue to be dominated by financial services and natural resources companies. Private equity investments like our own in the consumer services space can allow the pension funds to benefit from some of the fastest growth opportunities in Africa.
Increasing African pension fund allocation to alternatives such as private equity is an emerging trend that should be monitored as the biggest economies on the continent continue to grow, become more stable and begin to assert themselves increasingly on the global stage.
Hurley Doddy is co-CEO of Emerging Capital Partners, a pan-African private equity investment firm