Investing in Africa
Despite growing interest for emerging markets, pension funds are still hesitant about them. Peter Hinton, managing director of Enterprise Banking Group in Botswana, says that funds were not yet heavily investing in African emerging markets due to the problem of finding the right investment vehicles or entities for their investment needs. While pension funds may make SRI portfolio investments in terms of quoted companies on African stock exchanges, their direct investments in privately held companies or venture capital funds are very limited.
Hinton says funds have not really looked at the sub-Saharan African emerging market as they regard it as too difficult or have not explored whether suitable vehicles or entities are available.
He adds that emerging markets have a significant need for pension fund investments and provide good investment opportunities.
"We, for example, do SME (small and medium sized enterprise) lending. We invest in value-driven banks in Africa that lend money to small businesses on a socially responsible basis. We could take pension fund money that would be held in Botswana and then deployed around Africa, giving a social as well as a commercial return on the investment," Hinton explains.
"Entities like ourselves do exist but we have not approached pension funds yet with a view to investing. I know that pension funds are interested in SRI in emerging markets but which ones have the appetite for this has yet to be established. And for this to happen a dialogue needs to take place."
However, Jonathan Bond, managing director for fundraising at private equity investor Actis, says that pension funds already invest in emerging markets.
"In the funds we manage for emerging markets in Africa, Asia and Latin America, we have a number of pension funds which are investors. But some funds are worried about the amount of capital that is flowing into emerging markets, while others are worried about the high levels the public markets have reached."
But he sees a growing appetite for them. "Around $35bn (€26.5bn) is committed to emerging markets private equity now, of which about $20bn has come in over the last nine months. But pension funds look for outperformance to compensate for the risk against what they can get in conventional private equity funds. So traditionally people are looking for something between 22-25% net returns. We put a big emphasis on ethical investing and ensure that the companies we invest in have the highest standard of governance," says Bond.
Hinton believes risk exists in all markets but can be managed by governance and transparency. He adds commercial returns should also be attractive to pension funds subject to the foreign currency risk. This means the investments need to perform weel enough to cater for any currency risk.
But African emerging markets differ from country to country.
In Botswana, for example, the International Financial Services Centre (IFSC) helped to create an environment that made it easy to invest in Botswana entities with SRI activity due to the lack of withholding taxes, currency restrictions and a low tax rate.
Hinton says: "Some African emerging markets may lack investment interest because their tax regimes are not conducive to inward investment. Each country has to be seen on its own merits."
Local pension funds in Botswana and South Africa make direct as well as portfolio investments. But Hinton thinks emerging markets pension funds lack awareness of SRI. He believes there is more awareness about SRI and carbon emissions in the developed world than in the emerging markets field.
"It would be interesting if a greater awareness were to develop in emerging markets among local pension fund managers who say ‘we want to make our own SRIs'."
He adds: "If local pension funds could benefit from the expertise built up in developed markets this could benefit the sector as a whole."