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US pension funds embrace private equity in Africa

That Missouri’s 111,000 retired state workers receive some of their pensions thanks to Africa consumers may seem unlikely.
But while African pension funds still tend to err on the side of caution and, for the most part, avoid investing in domestic private equity funds, US pension funds are embracing private equity on the continent.

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As pension funds the world over struggle to meet their responsibilities, many are considering a larger exposure to African economies to tap into growth of, on average, close to 5 per cent a year. Some sectors, particularly those serving the nascent middle classes, have been growing much faster, at up to 20 per cent a year.
The $9.3bn Missouri State Employee’s Retirement System (Mosers) has for the past few years put money into private equity funds in Africa run by both Actis, which invests in Asia and Latin America as well as Africa, and Development Partners International (DPI), which focuses on Africa. Both private equity firms make investments that tap spending by the continent’s consumer class, from companies that provide healthcare and education to expanding electricity supply and shopping malls.
Big US pension funds such as the $180bn New York State Common Retirement Fund and the $107bn Washington State Investment Board are also putting their money to work in Africa.
“We’ve seen a huge increase in interest in . . . Africa in the past 18-24 months,” says US-based Adiba Ighodaro, partner for investor development at Actis, which has raised money from both Mosers and Washington State.

$3.1bn
Amount of African private equity raised in the first half of 2015

“In the US, people have been faster . . . to execute on that interest, whereas for others, the execution is still not at pace with the greater appetite.”
Ms Ighodaro has taken US investors on a number of trips so they can see for themselves the growth on the ground.
“They come away with a . . . totally different perspective. Look at Nigeria, Nairobi and what’s been going on — the growth in consumption, the investment opportunities are practically tangible. You just have to drive around and you can almost touch and feel it; it’s a very important part of the process.”
Mosers and a European corporate pension fund have also invested in both of DPI’s Africa funds, the second of which closed this year at $724m, 45 per cent above target.
“In our second fund, the biggest set of investors is actually pension funds,” says Runa Alam, DPI’s chief executive and co-founder, saying it attracted six pension funds, only one of them from Africa. “Most would like to invest $25m-$75m at a minimum. If pension funds invest and reinvest [in the subsequent fund], it’s a proxy for having done well; it creates confidence not only in the fund but in Africa in general.”

111,000
Retired Missouri state workers with pension fund money in Africa

For South African private equity managers such as Ethos, US pension money is old news. Nearly a third of its $800m Fund VI comes from pensions.
“We got support from US pension funds with our third venture close to 20 years ago; South Africa had just opened up,” says Ngaalah Chuphi, partner at Ethos. But the rest of Africa has now moved up the agenda for US investors.
African private equity raised $3.1bn in the first half of this year, likely to surpass the most recent peak total of $4bn raised for the entirety of 2013, and not far off the record peak of $4.7bn raised in 2007 before the global financial crisis hit.
That might represent only 1 per cent of global funds raised for private equity, but managers are looking to the future.

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