The increasing challenge facing the pension fund industry is the hunt for yield for its pensioners amid an environment of low interest rates. This is interestingly a similar challenge faced by asset managers who are continuously asked to deliver higher than expected returns while limiting the downside risk of the portfolios they manage.
At AXYS Investment Partners, we encourage having portfolios which contain alternative products as an asset class. We believe pension funds facing these challenges may not achieve their required return targets by keeping a traditional mix of Fixed Income and Equities.
Krishen Patten (left): CFA, FRM, Chief Risk Officer and Kugan Parapen (right), Chief Economist – AXYS Investment Partners
Given the long-term horizon generally available to pension funds, they should seek to enhance returns by adding illiquid and private investments to their portfolios while obviously maintaining an adequate level of diversification.
Additionally, African pension funds should tap into their own markets within Africa. African markets are becoming more sophisticated but international asset managers are taking time to look at the available opportunities. We believe that with proper due diligence there are excellent opportunities available to pension funds to achieve the required risk-adjusted returns.
Corporate issuances in Africa also offer good investment opportunities. Although a corporate issue cannot have a higher rating than its own country of domicile, it is sometimes the case that these companies have a pan-African or even global presence, making them diversified and less risky than may be portrayed by their investment rating. These are investment opportunities that should not be ignored in the hunt for yield.
"Given the long-term horizon generally available to pension funds, they
should seek to enhance returns by adding illiquid and private investments
to their portfolios while obviously maintaining an adequate level of diversification.
AXYS Investment Partners provides such advice to our institutional clients. We offer portfolio management services and have a team of professionals with a diversified and international experience in these fields. We collaborate with top-tier international global financial institutions and we have built a close relationship with markets leaders in their respective fields.
This blend of expertise enables us to provide our client base with innovative products in an open architectural structure. We have developed significant savoir-faire in alternative investments, targeting unsophisticated markets.
Through a methodical and focused approach, we deliver independent, tailor-made and innovative financial solutions that make a difference in shaping our clients’ portfolios and achieving their long-term investment goals.
There are a number of challenges facing the pension fund industry. AXYS Investment Partners strongly believes that investment opportunities in Africa could hold the key to enhancing the risk-adjusted returns required by the industry.
Kugan Parapen: Chief Economist – AXYS Investment Partners.Kugan holds a BSc (Hons.) in Economics from the University of Warwick in the UK and has completed his CFA Level III examinations. Kugan started his career in 2008 as a European interest rate derivatives trader at GHF Futures Ltd, an international proprietary trading company. He moved to MCB Capital Markets in 2011 and managed the CIS Bond and Currency Fund. He joined AXYS Investment Partners in 2014 as a Fund Manager focused on Fixed Income. Kugan is a member of the Investment Committee and Risk Management Committee.
Krishen Patten: CFA, FRM, Chief Risk Officer – AXYS Investment Partners.Krishen holds a First Class Honours degree in Actuarial Science from the London School of Economics & Political Science (LSE). He started his career in the Market Risk Management & Analysis division at Goldman Sachs in London in 2006 where he risk managed multiple asset classes for trading desks before being promoted to Executive Director/VP. He then joined LCH.Clearnet, a leading European clearing house, as a Fixed Income Risk Manager in London in 2012. He subsequently relocated to Abu Dhabi (UAE) in 2013 to work as a Senior Risk Specialist for the Abu Dhabi Investment Council, a multi-billion dollar sovereign wealth fund of the Government of Abu Dhabi. He joined AXYS Investment Partners in 2016. He is a member of both the Investment Committee and Risk Management Committee.
AXYS Investment Partners Ltd is licensed by the Financial Services Commission (FSC) of Mauritius to act as an Investment Advisor (unrestricted), CIS Manager and Distributor of Financial Products.
• Africa Investment Forum
11-13 Nov 2019 , Sandton Convention Centre, Johannesburg, South Africa
Private equity funds are spoilt for choice as African based private companies look to scale operations beyond country based operations to regional markets in the continent and beyond. Africa is the last frontier that private equity funds cannot afford to miss out on the growth trajectory of the continent. The lessons from China of yester-years and Africa of today have pointed to where smart money should flow. The advent of private equity funds into Africa so far has led to capital to flow since calculations on the average excess return rolling averages can determine the skill ratios via excess rolling returns of the standard deviations. The attractiveness of private equity as an asset class is fueled by investment diversification mandates of sovereign wealth funds and pensions funds since as an asset class there is demonstrated historical out-performance in the long term. Majorly, private equity funds have been within the buyout, venture and growth strategies. This is slightly changing with increased focus in real estate, private debt, natural resources and infrastructure. As evidenced in funding within green energy, infrastructure will be the next space with risks being long term funding requirements and huge funding outflow. The balancing act would be on fund tenures and expected returns. The aspects of risk mitigation must be viewed from multiple angles on the basis of asset backed funding, sovereign guarantees or ceding of project cash flows.
The City UK Fund management report in 2015 places global assets under management by institutional investors at US$ 114 Trillion of which private equity funds accounted for 3.5% of the total1. The PWC asset & wealth report places global assets under management at US$ 145 Trillion by 2025 with alternative asset classes – real assets, private equity and private debt reaching US$ 21.1 Trillion by 2025 representing 15% of global assets under management2. The inflows majorly led by pension funds, insurance companies, sovereign wealth funds, high net worth individuals among others.
The international equity players are looking for diversification as Africa offers superior returns at arguably twice the pain. This is in consideration that risks about ranging from lack of foreign exchange (where no controls or restrictions) to political instability. The risks in the continent can be mitigated on deal by deal basis with a view to have a diversified portfolio as opposed to a concentrated portfolio.
According to SAVCA, in 2017 South Africa’s private equity funds invested R31 billion; approximately 30% in early stage businesses3.
Africa based private equity players should take advantage of global scenarios to bulk up on assets due to US driven trade wars; US tax changes and BREXIT. The deliberate China youth entrepreneurship policy with 14, 000 enterprises registered a day is an eye opener. This will in turn benefit private companies since with improved liquidity investments will be competing. The discussions on debt investments mirroring equity returns do hamper private companies growth prospects. The advantage of private companies with sovereign exposure is agility, this talks to quality of management strategy.
Africa based private equity firms are willing to consider smaller deal sizes across various countries and sectors. The main themes are within the parameters of sector defensiveness to systemic macro risks. The sectors being:
- Food & beverage,
- Retail & Wholesale
- Renewable energy
- Real Estate and
- Agro processing.
The typical private companies targeted are those looking for expansion capital as well as diversification across product lines or borders. Private equity funds are typically bot interested in distressed assets or turnarounds.
Interestingly the specialist finds are in healthcare, education in Infrastructure. Impact investing as a theme is gaining traction with funds applying different metrics to make investments including Impact Multiplier factors to determine the positive impact results of their investments.
Interestingly there is a lot of interest for education, health and energy which fall under social amenities as governments responsibilities. The funding gap is huge and the opportunity is therefor to disrupt the sectors via innovation. The issue of government policies is still an impediment especially on energy sector regulations with Independent Power Producers (IPP) licenses issuance and off take agreements for utility scale projects.
The allocation decisions are determined by mandate, size, age and capacity hence it is critical for the private companies be able to be guided to get suitable funding with the understanding that the process is complex bur fundamentally can be broken down as per below:
For companies in the continent looking for capital the above chart illustrates the process of funding. The preparation aspect with all relevant documents reduces the time taken for deal evaluation since the critical part is get funders interested in the opportunity based on company intrinsic values including management team to markets dynamics namely size and scalability. The companies must be able to talk the same language with the investors which in most cases leads to capital raising failures.
In conclusion, Africa is about relationships and understanding the terrain which private equity firms can take advantage of with the right partnerships. The structuring of the private equity fund is also critical on the basis of whether it is structured as single sector or country fund or protected cell company (PCC) where there is flexibility to have sectoral exposures across countries.
Japheth Munyw'oki is the CEO of Goodson Capital Partners, a Johannesburg based Investment consultancy.
 The City UK Fund Management Report 2015 published on 08-06-2015 at https://www.thecityuk.com/assets/2015/Reports-PDF/9812c8ec8e/Sovereign-Wealth-Funds-2015.pdf
 Asset & Wealth Management Revolution: Embracing exponential change published on 30-October-2017 at https://www.pwc.com/gx/en/asset-management/asset-management-insights/assets/awm-revolution-full-report-final.pdf
 SAVCA 2017 Private Equity Industry Survey published June, 2017 at https://savca.co.za/wp-content/uploads/2017/06/SAVCA-2017-Private-Equity-Industry-Survey-electronic.pdf