The allure for investment in the Middle East countries has been no less infectious to pension funds as it has been for individual high net worth individuals in Africa.
As African economies have grown, pension funds have accumulated more funds than ever before. As a result. A recent study estimated that the 10 largest funds in Africa held a combined $310 billion in assets. This has been driven my many reasons, among them, the shift in many countries from defined benefits to defined contribution schemes.
For instance in Botswana, which made the switch in 2001, there are more than 100 pension funds jostling for funds in a country that has a population of 2 million. The top 10 funds in the country account for more than 80 per cent of the assets accumulated, and this is the trend in many other countries in the continent.
However, far from amassing capital, African countries haven’t been very efficient at deploying it despite the development gaps in many of Africa’s economies like infrastructure and real estate. In Ghana, for example, less than 50 companies are listed and average daily volumes have shrunk in the last couple of years.
Pension funds in most countries prefer the default option of investing in domestic treasury bonds. In Nigeria, for instance, more than 80 per cent of the portfolio is invested in government securities. This limits the ability of growth of the industry and more importantly, it limits the return on assets that these managers can achieve especially when chasing the same pool of assets.
In recent years however, a new generation of investment professionals entered the scene with a different mind-set, deploying sophisticated asset management techniques to achieve geographic and asset diversification, and leveraging financial instruments in order to increase returns.
Although diversification in most cases has meant the first stop for African capital was London and other Western markets, in recent years the Middle East, and Dubai in particular, have been extremely charming as managers become increasingly enticed by the prospects of investing in hard currencies and property in a jurisdiction that offers stable annuity-oriented returns.
Dubai’s property markets is world-class, with top-notch infrastructure and a regulatory environment that is attractive to global investors. It’s therefore no wonder that African capital has sought the gulf.
This has been made possible by regulations that allowed local funds to invest significant portions offshore. South African regulations for example, allow pension funds to invest up to 25 per cent of their assets abroad; and these funds have increasingly moved abroad to Europe and Middle East. In Botswana, the law is even more liberal, allowing up to 70 per cent of the assets to be invested offshore.
As the pension fund industry in Africa increasingly invests abroad to deploy burgeoning pools of funds, Dubai and the UAE stand to be the biggest benefactors from the Middle East as these funds could provide a stable source of long-term capital.
Given the infrastructure deficit that is inherent in many of the African countries, UAE-based developers stand to benefit by using pension funds in Africa as a gateway to capitalise on the plethora of investment opportunities that are rife in the real estate and construction sectors.
Source; Khaleej Times