Centre of Excellence for African Institutional Investors (CEAII)

‘’Why are African not investing themselves in Africa’’? This was a question I received from an investor at an event in London, England and indeed it is a fair question.

With an estimated $1.5 trillion in institutional capital in Africa comprising pension funds, sovereign wealth funds and insurance companies, African capital is not having the impact it ought to have on the continent.

The reasons for this are manifold but two of the main reasons for this are firstly, high rates offered by local government bonds and secondly, a lack of capacity among most African institutional investors on the most optimal way to diversify profitably into other assets.

With the myriad of challenges and the enormous need for investment capital the continent needs every year, it is very important that local institutional pension funds are active participant driving investment across Africa.

However, these African institutional investors face several challenges not least that in many cases, they work in immature markets where the ecosystem needed to drive their business forward is missing and, in many cases, they also face policy roadblocks set up by well-meaning but ill-informed policy makers.

These are some of the reasons why we formed the Centre of Excellence for African Institutional Investors.

We believe that African institutional investors are at an inflection point in their history and can shift from simply being managers of capital to wealth creators and wealth managers that play a vital role in investing African capital both locally, regionally, and internationally and in doing so, they are very intentional about changing the narrative of Africa from an investee to an investor.

This period is unique for two main reasons Firstly, the need for investment in Africa is very large and far beyond the ability of any government to meet and we are currently seeing a trend of ‘public goods’ being shifted from the public to private sector.

This means that services which were traditionally the duties of government are now being shifted to the private sector for example healthcare, education, social security and various aspects of government administration.

This is more than simply privatization, it is an admission by African governments that they play too large a role in the African economies and in many cases, their influence is having a distortive effect on the economies. It is a dramatic shift in thinking and suggests a maturation of these economies.

The effect of this has been that institutional investors as local pools of capital are being called upon to shoulder much more of the investment burdens of these economies.

The hope is the less the government must do, the less they will need to raise money through capital or through taxes and these will allow the private sector to thrive.

While this is commendable and ought to be applauded, it has put a lot more responsibility on local institutional investors who will need to change their operating models because of for so long, they have worked with their governments in a different way.

For a long time, the relationship between African institutional investors was simple. The governments ran very large administration and had many responsibilities and was always in need of cash and therefore will issue government bonds with attractive rates which the institutional investors will gladly buy because it is the government that is the borrower, and any credit risk is ideally compensated for in the high interest rates which is usually in the region of 13 to 20%.

The challenge with this is the high coupon on these bonds becomes the effective risk-free rates in the nation and other forms of borrowing to the private sector will be the rate at which capital is lent to the government plus a premium depending on the identity and profile of the borrower.

This situation has strangled the free flow of credit for investments in the private sector across Africa because the rates are far too high and, in many cases, this disincentivise the commercial banks from lending because why do they have to go through all the trouble and risk of lending to private entities and individuals when they can make very attractive profits by lending fairly safely to the government without expending much effort.

Governments across Africa have realized that this situation has become unsustainable because they have very large and unsustainable balance sheet and in many cases are simply borrowing to survive not to invest so while they fall in greater debt just to survive, the nation around them is dying of decay and neglect.

Therefore, they decided to change their relationships with the local institutional investors by divesting these public goods to the private sector that will manage it better and they can benefit from more taxes that comes from a growing economy.

The second reason why this time is significant is because of the growth in the middle class in Africa. Owing to technological advances, many Africans have been and are still being brought into the formal financial sector which includes many that were unbanked.

It is worth noting that unbanked does not necessarily mean poor because for a long time, Africa has been primarily a cash economy and traditionally African culture emphasized extended families that looked after one another with children obliged to look after elderly parents.

Therefore, there was little need for banks and other financial services but as more people move to cities and adopt more Western stye of living which are nuclear families, greater disposable income and a greater reliance of technology then banking, insurance, pensions and other financial services become more necessary.

This group of people called the African middle class are growing very fast and is projected to reach 1.1 billion or 49% of the population of the continent by 2060 and as of now only 5-10% of people are covered by pension schemes in Sub Saharan Africa except for South Africa and an average of 5% of the population of Sub-Saharan Africa having any form of insurance.

These facts suggest an explosive growth trajectory for these institutional investors as demand for increasingly financial services are growing significantly.

Therefore, on the one hand, the capital managed by African institutional investors are growing and at the same time, they are being called upon to take more responsibility for the development of the African economy.

They are being pulled by these two forces and for them to thrive in their new role, there must be significant transformation in their operations so they can achieve and exceed global best practices.

We at the Centre of Excellence for African Investors understand these challenges and understand what it takes for our members to thrive going forward.

 In further articles, we will discuss what specific areas African investors need to focus on to meet the demands of their new status.