As pension funds around the world increasingly invest in new asset classes in search of yield, investments in infrastructure have been identified as offering the potential to not only provide diversification, but to match other long-term pension assets and to enable positive socioeconomic change. While infrastructure investments typically needed to be made through listed entities or real estate portfolios, funds are increasingly investing through alternative channels, such as private equity funds, or directly.
Monique Pennells, Head of Non-Banking Financial Institutions at Absa Corporate and Investment Banking (CIB), part of Absa Group, believes that the pension fund market has a significant role to play to increasing infrastructure investment on the continent.
Pennells refers to the recent change in pension fund legislation in South Africa which broadens the definition of infrastructure and allows South African pension funds to increase investments into infrastructure development projects elsewhere on the continent.
“These changes are critically important and relevant in the African context because the South African pension fund market is sizeable at USD213bn. It’s currently ten times the size of the next largest market in Africa and estimated at 85% of the total pension fund market on the continent, with the South African pension fund market representing 57% of the country’s GDP.” she explains. “This change in legislation and widening of the infrastructure development definition, paired with changes in asset allocation decisions by Pension Fund Trustees has the ability to change the face of the continent.”
Pennells says that whereas previously pension funds were limited in terms of type and size of infrastructure investment within South Africa – which was limited to a narrow definition of infrastructure asset allocation – the new regulations allow for up to 45% of pension fund assets to be invested in a broadened definition of infrastructure developments, and an increased allowance for investment into infrastructure in other African countries. She believes this will see an uptick in investments into infrastructure projects that will help to address current gaps that government and the traditional sources of funding alone cannot fund.
A broad trend, with energy implications
Pennells also believes that this is a trend that could be replicated in other African countries too, as the African pension fund regulations match the need for infrastructure of the continent. She says that the continent is expected to deliver opportunities for investment advisors, asset managers and pension fund trustees to revise investment allocations, and shift towards long term sustainable infrastructure projects. Pennells says that there is a still a deepening of the pension fund market expected in Africa, with countries like Nigeria, Tanzania and Egypt’s pension fund assets still representing less than 20% of the respective GDP’s. There is strong need to develop and maintain a track record of investable deals to manage the overall risk appetite and encourage investment from the pension fund market.
“At the recent 5th Pension Funds and Alternative Investments Conference held in Mauritius,” Pennells explains, “there were calls for active asset allocation into infrastructure investment, particularly from a resources and energy perspective. It would be amiss to disregard the potential risks to pension fund savings in investing in alternative assets and infrastructure development – striking a balance between long term yields for pension capital and safeguarding of the pension assets, but still allows for progressive investment decisions where long term sustainability is considered as part of the performance metric of a fund.”
Absa CIB believes that renewable energy is a vital investment for a cleaner, better future and has committed to the financing of clean energy by accelerating investments that make an impact on the continent’s provision of energy. Pennells believes that access to capital for such projects will be unlocked by facilitating pension fund investment into the energy sector. “At Absa CIB, we are working across the value chain to bring the owners of capital closer to those in need of capital, while managing the risks and packaging the deals to encourage increased participation by the pension fund market.”
Alternative investments and the move to mainstream asset allocation
“By giving pension funds the ability to invest in what we would typically have seen as alternative investments, we anticipate that these will become mainstream as the search for sustainable investment increases across the ESG (Environmental, Social and Governance) spectrum,” says Pennells.
She notes that moves to facilitate pension fund investment into infrastructure will affect also the ability of insurers to invest alongside the traditional lenders. “What’s interesting is that South Africa has one of the highest insurance penetration rates in the world, behind Luxembourg. Our long-term savings within the insurance industry are significantly large. And many people who might not be operating within the formal sector have a version of savings in the long-term life insurance market or with long term savings schemes. This emergence of a sustainable, albeit still alternative, asset class can create investment diversification broadly across financial services – which also benefits the community at large, so there’s a wide social development angle too.”
Absa CIB views pension fund investment in infrastructure as an opportunity to boost capital spend across Africa. “It’s something I’m very passionate about,” says Pennells. “Often, in financial services, it feels like we’re a step removed from being able to see the positive change we’re working towards in the real economy. The recent regulatory change and the drive to invest in sustainable projects by pension capital could mean the impact can be felt in a single generation, which is quite exciting.