The findings of a private equity (PE) market study by RisCura dispel the misconception that PE is a new asset class in the East African market.
The Private Equity Investment Guide and Market Study Report, was launched in October by the East Africa Venture Capital Association (EAVCA), Financial Sector Deepening Africa (FSD Africa) and the International Finance Corporation (IFC). RisCura served as the technical partner in gathering the relevant information and documentation for the report which will serve as a one-stop-shop for pension scheme trustees in East Africa to understand private equity investments.
Presently, African listed markets remain skewed to certain industries like financial services and telecoms, while the average pension scheme’s investment allocation remains skewed towards government bonds. The long-term liability profile of pension schemes makes them ideally suited to provide much-needed capital to drive the real economy.
Private equity is an asset class now afforded regulatory allocation across East African countries, so, what’s stopping pension scheme trustees from allocating more funds to PE? EAVCA consulted with RisCura because of its unlisted investment expertise and two decades of experience in providing solutions and advice to pension schemes, mainly in Africa.
The report reveals that:
• Rwanda allows for the highest provision allowing pensions schemes to invest up to 20per cent in alternative assets, including PE
• Uganda allows 15per cent and currently has the highest actual investment in the East African region (yet only has 2.2per cent of assets are allocated to PE)
• Kenya regulation allows up to 10per cent but is sitting at an approximate 0.07per cent allocation
• Tanzania and Ethiopia have no defined limits
RisCura further studied the market to formulate a gap analysis between the demand and supply of PE investment, and to make recommendations to bridge this gap. While the allocations were low, some data was missing, and the need for education was highlighted, the guide does, however, prove that PE is well-established in East Africa, where developmental finance institutions (DFIs) like the International Finance Corporation and Commonwealth Development Corporation have been investors of East Africa-focused funds for several years.
The findings also disprove the notion that pension schemes will be introducing outsized risk by allocating to PE. By simply addressing the knowledge gap, it removes a large quotient of risk from the capital allocation decision to PE. Further, pension scheme trustees in East Africa are in the fortunate position of being able to leverage off DFIs in terms of knowledge-sharing and upskilling.
The guide aims to be a common reference document, or educational tool for trustees to use. It serves almost as a “Google translate” in that it provides commonality in terms and understanding across pension scheme stakeholders. It articulates fundamental learning points related to better understanding of PE as an asset class, enabling and empowering pension scheme trustees to make impactful, informed decisions.
Importantly, by investing in private equity, pension schemes are participating in the creation of future listed companies. When PE funds contemplate exit opportunities, pension schemes have a vested interest in lobbying for listing these investee companies in this way, and can remain invested in these companies by virtue of them now being listed.
One of the proposed outcomes from the market study was for the publishers to contemplate commissioning a further study to examine the multiplier effect resulting from PE funding. A larger sample size of pension schemes will be important to review in time to come for a clearer view on how PE is performing in the East African market.
Evident from the findings is that East Africa remains poised for robust and sustained growth. The allocation to PE by East African pension schemes will only serve to accelerate the entrepreneurial spirit already self-evident in this region, which is a critical component of any growth model.