Asset AllocationFebruary 12, 2014

Pension Lifeboat Considers African Investment

The UK’s Pension Protection Fund wants to reassess how it looks at frontier markets.

Reported by Featured Author

(February 12, 2014) — The UK’s lifeboat for bankrupt company pensions, the Pension Protection Fund (PPF), is considering its options on investing in Africa for the first time, aiCIO can reveal.

The progressive UK pension lifeboat, which has been in surplus since 2010, has already met with several managers and discussions are being had internally on how best to get money into Africa.

“Frontier markets are an asset class that I’m not convinced we invest in the best way at the moment,” PPF CIO Barry Kenneth told aiCIO.

“We’ve seen a couple of people about it but there are no conclusions yet. We need to think about the asset allocation as it evolves over the next 15 years or so. You can’t ignore frontier area—people need to spend more time understanding these areas.”

The PPF is one of a growing number of UK pension funds looking to African funds, particularly equities and real assets, in the search for yield and diversification.

While the political, socioeconomic, and corruption risks are still too difficult to overcome for some, others are becoming pioneers for the sector.

Asking to remain anonymous, an investment chief at one of the UK’s largest corporate pension funds said it currently had a watching brief on private equity in Africa, but lamented the difficulty of negotiating deals to take majority ownership of African companies.

“There are problems around liquidity outside the major markets in Africa, and the Arab Spring has created issues in further reducing the size of the potential universe,” he investment head said.

“Because of liquidity issues, public equity managers may be permitted to hold private/pre-IPO issues. On the private side there are a few managers with track records but they tend to be in the major markets, such as South Africa and Nigeria.”

In addition, the Cornwall local authority pension fund has just appointed two fund managers to run a £60 million frontier market mandate, some of which may well be sourced from Africa.

Elsewhere in Europe, pension funds in Denmark have invested in the region. Old Mutual Asset Management, one of the key players in this space, told aiCIO the Danes were supportive of African funds because these investors were very sophisticated in how they treat illiquidity premia.

There are even signs that US investors are starting to become more positive too. Traditionally, US investors have been rather cold on African investments, but Wale Adeoson a former CIO at the Rensselaer Polytechnic Institute in Albany, NY, and now the founder and CIO of Kuramo Capital in New York City, has revealed some investors are starting to come on board.

“US endowments and foundations are the most sophisticated investors with a long-term horizon and appetite for venturing into non-traditional asset classes and regions of the world that are growing really fast,” he said.

The funds are attracted by the “excellent risk-adjusted returns by capturing the tremendous sub-Saharan Africa growth opportunity”, Adeosun continued.

“The biggest concern is risk perception. However, some investors are savvy enough to understand that they more than get compensated for that risk perception by attractive returns. Mitigating the risk perception is all about education to lower the required risk premium.”