Africa Finance Forum Blog
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African women represent a huge untapped market as emerging business leaders, consumers and household decision-makers. According to a recent Nielsen survey, 77% of women in emerging markets believe the future will be brighter for their daughters, noting that key areas where improvements will be greatest are education, careers, financial stability and purchasing power. These changes are already evident in many African countries as socio-economic indicators show an improvement in the living conditions of every-day Africans.
When one looks at the position of African women today versus two decades ago, one can see distinct improvements in the areas of education, health, earning power and entrepreneurial activity. In Uganda 48% of all small and medium-sized enterprises (SMEs) are owned by women. In Kenya, the corresponding figure is 49%, and in South Africa 58%. Motivated by economic necessity, better education and expanding job opportunities, African women have some of the highest rates of female labour force participation in the world. Overall, 60% of women in Sub-Saharan Africa are in the workforce, with some countries such as Mozambique, Madagascar, Rwanda, Tanzania and Burundi having more than 80% female labour force participation.
With better economic opportunities women’s incomes have increased as has their spending power, fuelling the rise of the African consumer. McKinsey documents this trend in their study “Lions On The Move,” by showing that the numbers of people living in extreme poverty are falling and that there are more middle-class households in Africa today than India.
The fact that women control or strongly influence many household spending decisions means that their power as consumers will drive demand for products and services in different sectors that is not to be taken lightly. Globally, women spend close to $20 trillion as consumers and this figure is expected to reach $28 trillion by 2014.
In the banking sector - one of the sectors mentioned in the McKinsey report as poised for growth in the next decade - massive growth is taking place across the continent due to higher consumer demand and more business activity as the private sector expands. Despite enormous challenges in many countries such as inadequate banking infrastructure and high consumer costs, Africa’s banking sector has grown rapidly in the last decade with total assets of $669 billion in Sub-Saharan Africa, and $497 billion in North Africa. In Nigeria, total banking assets grew by more than 59% annually from 2004 to 2008. The downside is that levels of financial inclusion across the continent are still woefully low with the majority of Africans lacking access to formal financial services. Women are particularly excluded with as few as 21% of women having an account at a formal financial institution.
This lack of access to capital and a broad range of financial services is a big factor in restricting the growth of women-owned businesses. African women continue to face well-documented barriers in accessing finance that are gender-specific as well as those that apply to all SMEs, regardless of gender. As entrepreneurs, women struggle with issues of collateral, poor education and business training, a lack of understanding of how banks work and cultural biases which hinder their progress. This situation is made worse by legal and property regimes which often discriminate against women by preventing them from owning assets such as land, or having the right to administer marital property.
A G20 study released in 2011 estimates that the funding gap experienced by women-owned businesses around the world who lack adequate access to finance is an astonishing $300 billion per annum, with African women facing a funding gap of $15-18 billion each year. Seen in another light, however, this SME funding gap represents a huge opportunity for commercial banks and other lending institutions that are willing to take this segment of the market seriously. Some banks are already coming up with specific products geared to the female market while others are experimenting with different types of collateral requirements which are more flexible and take into account women’s realities. These innovative approaches to SME lending are to be encouraged and will hopefully see more investment in women-owned enterprises to boost their growth.
There can be no doubt that one of the factors that will drive Africa’s continued high growth is how it treats its women and how it harnesses their enormous economic potential. At the recently held African Women’s Economic Summit, which took place in Lagos, Nigeria, Dr Ngozi Okonjo-Iweala referred to women as the “third emerging market” noting the benefits of investing in women for themselves, their families and the continent, as a whole. As she rightly points out, “we are on the cusp of a very exciting phase in the life of African women. They are the new face of an Africa on an upward trajectory of growth and development.”
Nomsa Daniels is Executive Director and founding member of New Faces New Voices, a pan-African organization which advocates for the empowerment of African women through the provision of better access to finance for women entrepreneurs, skills development and training for women in business and finance, and ensuring more women occupy leadership positions in the financial sector. Ms Daniels has worked in the investment business for the past 10 years, as Executive Director of Scientific Resource Management Holdings, an investment holding company that invests in start-ups, early-stage businesses, and established companies across different sectors in South Africa. Prior to this, she worked as a Consultant in the Investment Banking Division of JP Morgan where she helped to analyze and identify new business opportunities for the bank and supervised special projects for the Managing Director. Before returning to live in South Africa in 1997, she worked for 10 years as Executive Director of the Professional Development Program, a not-for-profit organization based in New York City that provided management and leadership development training in the United States to black South African business professionals. She has a Bachelor’s Degree from the University of Toronto and a Master’s Degree in Geography and Environmental Studies from Hunter College in New York. She serves on the board of the Graҫa Machel Trust, the African Leadership Academy and several investee companies.
Sub-Saharan Africa has come to represent one of the biggest growth stories in emerging markets private equity. According to the Emerging Markets Private Equity Association, fundraising by fund managers for Sub-Saharan Africa rose from US$800 million in 2005 to over US$2.2 billion in 2008, before falling back to US$960 million in 2009 and rising to US$1.5 billion in 2010. 2011 saw fundraising fall slightly to $1.3 billion, with $490 million raised in the first half of 2012.
Fundraising for Africa has been led by development finance institutions, international commercial banks, pension funds and even foreign private investors (family offices). According to an EMPEA / Coller Capital published in 2011, 38% of LPs planned to “begin or expand Africa commitments”. This compares with just 16% a year earlier. The same study found that 67% of LPs found Africa “attractive or very attractive”, compared with just 37% in 2010. With increasing foreign interest in private equity in Africa, the issue of local capital (or lack of it) in private equity in Sub-Saharan Africa has become a hot topic for the industry.
Long term savings vehicles (mainly pension funds) are uniquely placed to manage the long investment term and limited liquidity of private equity. In the African context, domestic pension funds would also capture a significant performance premium and the benefits of portfolio diversification. Based on latest available figures, if the largest African markets by assets under management were to invest 5% of their portfolio in private equity, a potential US$17 billion could be released to support private sector investment in Africa. Increased local capital could also play a catalytic role in attracting international capital to the continent. With assets under management in major countries like Nigeria increasing at 30% a year, this potential is set to increase still further in future.
Unlocking this potential means addressing the many challenges that African institutional investors face. First among these is the lack of awareness about the asset class across the continent. Even in South Africa, with its sophisticated financial markets, few pension funds have experience of or knowledge of private equity. One of the basic principles of successful investment is “stick to what you know”, so until African pension funds become more familiar with the asset class, the dream of an industry led by or with significant participation from local investors will remain just that. Achieving this requires understanding and openness, from the industry (fund managers and investors), local investors, policy makers, regulators etc. Pension funds, regulators and other stakeholders must be empowered with the right information which enables them to evaluate if and how private equity fits within their investment strategies and objectives.
It is in this context that the Commonwealth Secretariat has worked with the African Development Bank (AfDB), the African Venture Capital Association (AVCA), and Aureos Capital organised a series of regional roundtables on Private Equity in Africa, to:
- Introduce participants to private equity as an asset class;
- Familiarise participants with the private equity industry in Africa and provide the opportunity to meet with fund managers, investors and other stakeholders;
- Provide participants with an understanding of the structure of private equity funds, their operations and governance, and
- Identify next steps to promote increase local participation in the private equity industry in Africa.
Regional roundtables have been held, in Nairobi (for East Africa) in May 2010 and Gaborone (Southern Africa) in October 2010 and Accra (West Africa) in May 2011. A pan-African workshop was also held as part of the AVCA conference in Accra earlier this year. Country events have also been held in Kenya (March 2011) and Nigeria (September 2011) in partnership with their respective pensions regulators.
Feedback from these roundtables has been overwhelmingly positive. The regional approach has worked well in terms of raising awareness of the private equity and the barriers to increased participation in the industry by domestic investors. However, different levels of awareness and country level regulation means that there are different priorities / needs amongst the countries, even within the same sub-region.
Specific recommendations for follow up activities have included:
- Education and capacity building at all levels for all stakeholders (including regulators, other institutional investors, policy makers and lawmakers) Policy makers in particular need a better understanding of private equity kind of environment in which it can thrive;
- Practical assistance for the development of appropriate regulatory regimes and knowledge sharing amongst stakeholders, and;
- Further research into private equity in Africa – areas of focus would include regulatory environment, funding raised, local participation levels etc.
In parallel with this educational effort, several African countries are in the process of reforming and liberalizing the pension sector. The revised Regulation 28 of the Pensions Fund Act in South Africa is probably the best known example of this. Under the regulation, institutional investors can invest up to 10% of assets under management in unlisted equities. This is up from historical figures of 5%, which encompassed all alternative asset classes, to a universal figure of 15% for both private equity and hedge funds. This is indeed a significant development, even more so now that the Public Investment Corporation has announced that it is looking at committing some$3.8 billion to private equity, following these changes.
Reform in Nigeria is also paving the way for pension fund investment in unlisted equities. The regulator, National Pension Commission (Pencom), was established in 2004 to regulate and supervise the pension fund industry. With total pension fund assets of approximately US$13 billion as at December 2010, and a growth rate of close to 30% per annum , Nigeria represents a potentially significant source of funding for the private equity industry.
Prudential limits for private equity and alternative assets have been capped at 5% of assets under management. However, the regulations also require a minimum of 75% of funds need to be invested in companies or projects in Nigeria, and among other requirements, funds need to have multilateral development finance institutions (DFIs) as Limited Partners.
Some commentators have argued correctly, that these requirements are unnecessary and pose a few problems for general partners and pension funds alike. A 75% exposure requirement to Nigeria effectively creates a Nigeria fund, concentrating risk – country, currency and political. The nascent nature of private equity in Nigeria and Africa in general is such that Pencom should be encouraging pension funds to use private equity as a risk diversification tool. In looking at private equity alongside other asset classes – how much diversification is being achieved by pension fund managers? Are potential political and economic considerations coming at a cost to a pension fund’s mandate and returns?
The issue is slightly different from a regulators standpoint. Their first duty is to protect the pensions of their fellow citizens. In that context, it would be unwise (to put it mildly) to allow pension funds unfettered access to invest in an asset class which neither they nor the regulators are fully familiar with. We only have to look to the origins of the global financial crisis to understand the potential damage that could cause. In that context, the slowly slowly approach taken by some regulators seems reasonable. The idea behind the additional restrictions in places like Nigeria is to get the pension funds to learn from experienced LPs (hence the requirement for DFIs) and then slowly lift these restrictions. From a market development point of view, it is hard to argue with that. It is also worth noting that despite these restrictions, some fund managers have successfully raised not insignificant sums from Nigeria. Yes the structuring has been perhaps more costly and complicated, but it can and has been done.
In the end, whether we see increased domestic capital in African private equity (and perhaps who gets that capital) will depend significantly on the willingness and capacity of fund managers to invest time and energy in engaging with and understanding local investors and regulators: What are their issues? What are the risks from their point of view? How can fund managers, existing LPs and industry associations work with them to resolve these? That is the true challenge of unlocking African institutional capital for private investment.
David joined the Commonwealth Secretariat in May 2007. He leads the Secretariat’s investment and private sector development programmes, including the Commonwealth Private Investment Initiative (CPII). CPII has helped to raise US$800 million for investment in Africa, South Asia and the Pacific through a series of private equity funds. David has been leading efforts to unlock local capital in Africa through a series of workshops for institutional investors, regulators and other stakeholders over the past two years. David previously worked for the International Finance Corporation (IFC) in Cote d’Ivoire, Cameroon and South Africa. Prior to IFC, he was a Project Officer responsible for Infrastructure at the Agence Française de Développement in Ghana. David has also worked as an Analyst in the Corporate Finance Department CAL Bank in Accra, where he set up and managed the bank’s brokerage subsidiary.