If Africa is to become better insulated from global economic upheaval, it will need to tap into a local investor base.
With Ghana and Kenya – two of the largest economies in sub-Saharan Africa – agreeing IMF bailouts in the last year, the region’s vulnerability to geopolitical and macroeconomics has once again been exposed.
The Russia-Ukraine conflict is putting supply and price pressure on food imports, rising interest rates are boosting the cost of debt and inflows of foreign direct investment are falling.
This situation begs the question of how economies in Africa can become better insulated and less susceptible to global economic challenges. In recent years, Africa’s institutional investor base has proliferated, to a point where it has the potential to become a key part of the solution.
A study by the International Finance Corporation (IFC) in 2022 found that the AUM of pension funds across seven of Africa’s largest economies grew by an average of 65% between 2016 and 2020.
Increasing urbanisation, professional employment and economic development will likely fuel their growth and influence in the coming years. These investors have the ability – even the responsibility – to contribute to economic development and reduce reliance on international sources of capital.
Compared to developed economies in Europe, North America and Asia, Africa’s institutional investment landscape is immature. Investments are largely concentrated in perceived lower-risk instruments, such as government bonds, and regulatory oversight and policy approaches have yet to develop.
The IFC study found that pension fund investment in alternative assets, such as infrastructure, private equity, venture capital, real estate and sustainable financing, accounted for a minute share of assets – ranging from zero to 2.7% across the markets they looked at.
By limiting their investment horizons, institutional investors are also missing out on the potential to generate alternative, possibly superior, returns
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This is a cause for concern in its own right as portfolio diversification is one key way to help spread risk and reduce the impact of underperformance of a particular sector or asset class.
Given the current economic situation, concentrated investing in government bonds is far from a safe bet, with default remaining a very real possibility. Ratings agencies Moody’s, Fitch and S&P have all downgraded Kenya’s credit rating with a negative outlook this year amid concerns over rising liquidity risks.
By limiting their investment horizons, institutional investors are also missing out on the potential to generate alternative, possibly superior, returns – and ultimately, sustainable impact in their communities. Alternative asset classes offer diversification and potentially more nimble investment styles.
These investors can dig up overlooked opportunities and unlock value, and work toward very specific outcomes by taking a hands-on approach. For example, it is possible to invest in funds tackling critical environmental or social challenges, such as the provision of clean water, health care, housing, or food security.
As well as creating positive impact and development, investing locally directly can stimulate growth and economic activity through job creation and local purchases.
Broadening investment horizons can be easier said than done, however. Investors need to be more attuned to the opportunity and embrace more sophisticated portfolio management techniques. They must zero in on investment objectives, target outcomes, sectors, investment types and return profiles.
This places greater pressure on decision making and due diligence, but has the potential to lead to greater benefits for all stakeholders.
Regulators’ great role
Regulators have their part to play in developing Africa’s institutional investment landscape too. They must build a more conducive environment that beckons institutional investors toward alternative assets.
One way would be to set minimum target allocations to alternatives. The industry is already headed in that direction, with the Kenya Pension Funds Investment Consortium (KEPFIC) urging the country’s leading pension funds to increase their allocations to alternative investments.
It’s an example regulatory bodies across Africa might look to follow. In addition, they might take greater steps to limit personal liability of pension scheme trustees for the investment decisions they take – as is already the case in Europe and other jurisdictions.
There’s no doubt that Africa’s institutional investors will have a huge say in how the continent develops in the coming years – and how it meets the myriad environmental and social challenges it faces. But the industry needs encouragement to step up and realise its potential.
Source: The Africa Report