Private equity and the growth of pension funds provide a massive opportunity to finance investment in Africa, industry experts have said.

According to the United Nations Economic Commission for Africa (ECA),in relative terms Africa still attracts a small percentage of private equity and international investment capital.

In a plenary at the Africa Development Forum in Marrakech focused on private equity, Mike Casey, the Founding Director at EMPEA Consulting, said that last year, about $300bn was raised globally for private equity.

Of that, 12% was reserved for emerging markets, and of those 12% ($38 bn) only 3% ($1.2bn) was for Africa-focused funds.

“The biggest challenge global institutional investors see when they approach Africa is the lack of established fund managers,” Casey said.

Ijeoma Agboti, Director at The Abraaj Group, said that though PE in Africa is a relatively recent phenomenon which started in the early 2000s, the opportunities it offers are great.

The biggest challenge when Abraaj started was to overcome the scepticism of investors who did not know them.

Highlighting the risks and challenges specific to the continent, she said: “Most businesses in Africa are family businesses and investors need to be very sensitive about that. An important development that we have witnessed and contributed to is the regionalisation of private equity in Africa. Businesses need to transcend borders and it is very important to build conglomerates”

Meanwhile, Nathan De Assis, Executive Director of Equity Capital Resources discussed the PE model that has worked in Zambia.

“We took the standard private equity model and shaped it within the Zambian context. We tried to use the capital in such a way that it allows SMEs to grow, create jobs and at the same time, contribute to the economic growth of the country. At the heart of the model is the idea that SMEs are the key engine of African growth. Investors need to provide resources to SMEs so that they grow,” he said.

“Once SMEs grow, the larger players within the market can pick them up and bring them to the next level. It was not easy to attract money because, given the state of our economies, pension funds are quite reluctant to give capital. What we have been doing is to try and convince policy makers and governments to encourage some of the pension funds to provide capital for SMEs,” he added.

In a side panel, David Ashiagbor from the AfDB highlighted the rapid growth of the pension fund industry and how it could provide a great source of capital for the PE industry.

Since 2008, for example in Nigeria, pension funds under management have risen from $6bn to $25bn.

Namibia has pension fund assets 80% of GDP, whilst Botswana’s has 40%.

However, regulatory reform is needed to ensure that this capital base can be accessed and is invested in the African growth story.

Right now 70% of these assets are sitting in riskless treasury bonds yielding returns upwards of 10%, which makes other asset classes risky in comparison.

Speakers agreed that there is a need to transform this growing interest for African markets into real financial commitments.

They concluded by saying that this is potentially a profound inflexion point for the private equity industry in Africa and emphasised that it was important to look, not only at the public sector, but also at small and medium enterprises.

There are a number of success stories, such as Equity Bank in Kenya, but this should not obscure the fact that private investors still face many challenges when investing in Africa.