In Africa, there has been the emergence of an ecosystem around pension funds.
A recent institutional investor study estimated that the 10 largest funds in Africa held a combined $310 billion in assets. This has transpired for a number of reasons, not the least of it being a shift in many of these countries switching from defined benefits to defined contribution schemes. In Botswana, for example, where the shift took place in 2001, there are more than 100 pension funds jostling for funds in a country that has a population of 2 million. The top 10 funds account for more than 80 per cent of the assets accumulated, a figure that is similar in other countries in the continent as well.
Yet, what is clear is that these countries have been very good at amassing capital rather than deploying it. In Ghana, for example, there are less than 50 companies that are listed and average daily volumes have shrunk in the last couple of years.
In most countries, the default option remains investing in domestic treasury bonds; in Nigeria, for example, more than 80 per cent of the portfolio is invested in government securities. This limits the ability of growth of the industry; more importantly, what it does is limit the return on assets that these managers can achieve, especially if managers end up chasing the same pool of assets.
Weak currency regimes further exacerbate the problem, and in response, what is transpiring is an increasing willingness to look abroad for opportunities. Although the pace of reform in pension funds is uneven across countries in the continent, what is common is the clarion call of achieving higher returns in order to not only capture a higher market share, but also to cater to existing clientele that are getting restless with the uneven pace of returns achieved in the past.
What we are also witnessing is a new generation of investment professionals that are coming to the fore, thereby changing the mindset and deploying sophisticated asset management techniques, by ways of achieving geographic and asset diversification, but also by leveraging financial instruments in order to increase returns.
In many instances, the first step towards diversification has been to look at the West in markets like London. However, in recent years, the focus has been turning towards the Middle East, and Dubai in particular, as managers become increasingly enticed by the prospects of investing in hard currencies in a jurisdiction that offers stable annuity-oriented returns.
In South Africa for example, the passage of a law allowed pension funds to invest up to 25 per cent of their assets abroad; and even though the initial flurry of deals that followed were in the continent of Africa itself, the largest funds have now increasingly moved abroad towards Europe and Middle East. In Botswana, the law is even more liberal, allowing up to 70 per cent of the assets to be invested offshore.
There is a sense of inevitability around the pension fund industry in Africa; a fait accompli in the sense of pension fund assets increasingly investing abroad to deploy burgeoning pools of funds. It is here that Dubai and the UAE stand to benefit, by looking at these investment pools as opportunities to attract stable long-term capital.
Undoubtedly, given the infrastructure deficit that is inherent in many of the African countries, there are cross-fertilisation opportunities, whereby UAE-based developers stand to benefit by using pension funds in Africa as a gateway to capitalise on the plethora of investment opportunities that are rife in the real estate and construction sectors.