Sovereign wealth funds currently have more than $6.7 trillion dollars of assets under management, up from slightly more than $3.2 trillion as recently as December 2007. US pension funds had $18.9 trillion of assets under management in 2013, a rise of more than 12% over the previous year and pension fund assets in the 13 largest markets totaled $32 trillion, up 9.5% over 2012.
The African Development Bank estimates that Africa must invest $95 billion per year to finance both the large scale, transformative infrastructure projects such as ports, roads, and utility-scale power generation and distribution systems that will facilitate the continent’s economic modernization and green growth and also the numerous smaller-scale projects that will provide energy, water, and health services to the hundreds of millions of people on the continent who currently lack access to some or all of these critical services.
Infrastructure investment on the African continent is currently running at a $45 billion annual pace, leaving an investment shortfall of $50 billion. As a simple arithmetic matter, that investment gap could be closed rather quickly if the managers of these global pension and sovereign wealth funds could be induced to invest even a small fraction of 1% of their assets under management in Africa’s commercially viable infrastructure projects.
That impeccable logic motivated HRH Prince Charles in 2006 to convene a meeting with the leaders of eight global pension and sovereign wealth funds (the P8) which morphed in subsequent meetings into a larger group of participants known as the P80. The objective was to develop new financial vehicles and instruments – what we have termed a new financial plumbing system -- that would facilitate pension and sovereign wealth fund investments in these commercially viable and socially beneficial projects.
Several financial innovations emerged, directly or indirectly, from these meetings. For example, pension and sovereign wealth funds explained that they were hesitant to take the risk of investing directly in unfamiliar emerging market infrastructure projects. Therefore, the World Bank, followed shortly afterwards by other financial institutions, began to issue so-called “green bonds,” generally backed by the full faith and credit of the World Bank or other issuing institution. Pension and sovereign wealth funds would buy the green bonds and the World Bank and other issuers would invest the proceeds in climate-smart investments which they had identified, prepared and supervised. The net effect was that pension and sovereign wealth funds would gain indirect exposure to, and familiarity with, this new asset class without taking the direct credit risk of unfamiliar projects in unfamiliar emerging and pioneer markets. To date, the World Bank has issued $6.7 billion of green bonds in 17 different currencies and financed 49 projects in 17 middle income countries. Meanwhile, green bonds from all issuers, including the World Bank, are expected to total close to $40 billion in 2014, on top of the $11 billion issued in 2013.
Similarly, during the P8/P80 meetings, pension and sovereign wealth funds explained that they did not have the capacity to assess country risk in a wide range of emerging and frontier markets, perform due diligence on local infrastructure projects in far flung places around the world, or make a relatively large number of smaller investments in smaller scale, local infrastructure projects. They much preferred to operate on the wholesale level, placing large chunks of money with well-known institutions that would invest the funds individual companies or projects. To address this issue, the IFC, the Asian Development Bank, and the European Investment Bank, among others were established a series of funds of funds, including IFC Catalyst Fund, Asian Climate Partners, and the Global Energy Efficiency and Renewable Energy Fund (GEEREF). Pension and sovereign wealth funds, along with other institutional investors could place their money in one of these funds. These funds, in turn, would invest the proceeds directly in smaller scale projects or they would place the proceeds with local private equity funds which have the first-hand, on-the-ground knowledge required to handle due diligence and supervise local investments.
When the initial P8/P80 meetings first convened, most participants assumed (and hoped) that Africa would be a major destination for these global pension and sovereign wealth fund investments. Virtually nobody expected African pension and sovereign wealth funds to be an important potential conduit or catalyst for financing these African projects. This assumption was quite understandable at the time. With the exception of sovereign wealth funds in Algeria ($77 billion of assets under management as of 2014) and Botswana ($6.9 billion of assets under management), the African sovereign wealth fund sector simply didn’t exist and the African pension system was at a similarly embryonic stage.
However, if those original assumptions were still prevalent today, the September 22 Africa Investor (Ai) CEO Institutional Investment Summit should have dispelled any lingering doubts about the potential vitality of the African pension and sovereign wealth fund sector. African pension and sovereign wealth funds have burst onto the global stage and are poised to play a major role in financing Africa’s development. In the past few years, sovereign wealth funds have been established in Angola, Equatorial Guinea, Gabon, Ghana, Kenya, Libya, Mauritania, Mauritius, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Sudan, Tanzania, Uganda, and Zimbabwe. As a recent publication from EMPEA, our GSS partner noted, a similar expansion of African pension funds is also underway.
The combined total assets under management of African pension and sovereign wealth funds are still rather small by global standards or relative to Africa’s investment needs. But African pension and sovereign wealth funds have grown rapidly over the past few years and are poised for continued rapid growth in the coming decades. Morgan Stanley, for example, projects that African pension fund assets, which currently total a not-insignificant $379 billion, will exceed $7 trillion by 2050.
However, perhaps even more important than their current size or future growth is the quiet work taking place to create an African financial plumbing system that can facilitate investments by Africa’s pension funds, sovereign wealth funds, and other institutional investors. The African Development Bank, for example, recently established the Africa50 Fund, headquartered in Casablanca, Morocco. The fund hopes to have an initial capital of $3 billion which will eventually be scaled up to $10 billion. The AfDB hasn’t published much financial and operational information about the Africa50 Fund on its website, except to say that there will be a pot of grant money to finance project preparation costs and a much larger pot of money to finance investments. However, AfDB President Donald Kaberuka has made it clear that the primary role of the Africa50 Fund will be to serve as a conduit or catalyst for channeling Africa’s financial resources into commercially viable African infrastructure projects. “For a long time,” he explained, “we have relied on external financing to fund our infrastructure. Now is the time for the African Development Bank to mobilise sovereign African savings – currently estimated at $1,000 billion – to build the Africa of tomorrow," Echoing those sentiments, the implicit theme of the recent Ai Summit was “Formalising Domestic African Capital as a Tool to Leverage Global Institutional Capital.”
African pension and sovereign wealth funds, in collaboration with the Africa50 Fund and other partners, are uniquely qualified to channel African and international capital to African infrastructure projects. By standing poised to invest in African projects, African pension and sovereign wealth funds may be able to serve as more effective advocates for necessary policy reforms than their international counterparts. They have greater credibility along with unparalleled access to top decision makers. Coinvesting alongside the AfDB and African pension and sovereign wealth funds may also provide a powerful form of political risk insurance. After all, if a government interferes with a project that its pension or sovereign wealth fund has supported, it will, in effect be confiscating the retirement savings of its own citizens. This should provide a strong deterrent to capricious behavior.
African pension and sovereign wealth funds still have to convince skeptics that their governance will be transparent and their capital allocation decisions will be free from undue political meddling. Perhaps not all of them will pass this test. Only time will tell. But judging from the high quality and impressive credentials of the pension and sovereign wealth fund participants and speakers at the Ai Forum, the future looks exceedingly bright.