PFAs Shun N615bn Opportunity in Private Equity Funds

As at December 31st 2020, Nigerian Pension Fund Administrators (PFAs) had committed ₦35.48 billion (over US$92 million) to private equity funds, the equivalent of 0.29% of total pension fund assets.

However, the potential for pension investment in private equity is enormous and far exceeds current allocations being made to the asset class.

Portfolio ceilings on the investment of pension funds in private equity (5%) means that ₦615 billion (over US$1.5 billion) of pension fund assets may be unlocked to invest in private equity funds.

In local currency, total pension fund assets have multiplied five-fold in the last decade, from ₦2.25 trillion (US$14.5 billion) in 2011.

The role of pension funds in Nigeria’s PE industry has evolved alongside the changes in regulation issued by the National Pension Commission.

Pension fund investment in private equity was non-existent prior to December 2010, when allowable investment outlets were expanded to include alternative asset classes such as private equity and infrastructure funds, among others.

This evolution in the permitted scope of their investments has enabled more investment into PE over time. Nigeria’s strong macroeconomic fundamentals in West Africa is a growth driver for the country’s PE industry.

As a regional powerhouse, Nigeria is home to the continent’s largest population and consumer class, and thus represents an established and relatively stable market for investment in West Africa in the long term, in spite of more recent short term macroeconomic challenges.

Nigeria consistently attracts a significant proportion of the volume of private equity and venture capital funding channeled to West Africa.

Between 2015 and 2020, Nigeria accounted for 58% of the total PE volume and 54% of the total value of PE funding allocated to West Africa.

Nigeria also commanded 65% of the total volume of reported VC deals in West Africa within this five-year timeframe. Underpinning Nigeria’s large share of the West African private equity market is their ascension in the World Bank’s 2020 Ease of Doing Business Report.

The Report named Nigeria (10) in their list of top-10 most improved economies globally, where Nigeria implemented six reforms and rose by 15 places to rank at 131.

In the midst of these growth drivers and macroeconomic tailwinds, the level of interest and investment in local private equity by Nigerian pension funds has grown substantially.

Nigeria was selected by the third largest share of LPs (41%) that participated in AVCA’s 2021 Private Equity Industry Survey as an attractive country for PE investment in Africa over the next three years.

Although Nigeria has slipped slightly from its longstanding first place position (in AVCA’s 2016-2018 surveys) it remains a rising star for both PE and VC investment in West Africa, maintaining its reputation as an attractive regional investment destination.

While there is a strong interest in investment diversification, the (relatively) high risk inherent to the private equity asset class can be a challenge for pension funds.

Regulatory bias in the allocation of pension fund assets is another challenge reducing the attractiveness of the private equity asset class for Nigerian PFAs.

Although the regulatory framework makes provisions for the investment of pension funds in private equity, such investments are capped at a maximum of 5% of the pension funds’ total assets.

When compared to other asset classes, this maximum permissible allocation is a bottleneck for the generation of local capital in Nigeria’s PE industry.

For example, Retirement Savings Account (RSA) Funds in Nigeria may invest between 60-80% of their total assets in government securities, and between 30-60% in money market instruments.

The subpar allocation of pension fund assets to private equity funds in Nigeria may therefore be attributed to these regulatory limitations restricting the proportions of capital that may be deployed towards the asset class.

A survey conducted by the African Private Equity and Venture Capital Association (AVCA) shows that very few of the Nigerian Pension Fund Managers (only 6%) have an exposure to alternatives amounting to 10% or more of their portfolio value across any alternative asset class.

88% of survey respondents have an exposure to Private Equity Funds and Infrastructure Funds, while 75% have an exposure to Real Estate Funds.

The vast majority of survey respondents (94%) do not currently have an exposure to Venture Capital Funds, further emphasising this conservative approach.

Four in five of survey respondents currently have capital commitments to private equity in Nigeria. When expanded regionally and continentally, the proportion of respondents with current capital commitments in private equity reduces significantly.

Only a third (33%) have capital commitments to private equity in West Africa, dropping to 27% with commitments to private equity in sub-Saharan Africa.

Turning to the value of these commitments, slightly over two thirds (69%) or respondents have committed between US$1 million and US$20 million to Nigerian private equity.

Larger ticket sizes (US$21 million and above) are concentrated in national and regional markets only.

Infrastructure was selected by the largest proportion of Pension Fund Managers (87%) as an attractive sector for PE investment in Africa over the next three years, with Healthcare following in close second at 67%.

A large majority (85%) of respondents that view Infrastructure as an attractive sector for future investment have current investments in infrastructure funds, although these investments only equate to less than 10% of the pension funds’ portfolio value.

Utilities, a prominent and growing sector of interest in West Africa (attracting 9% of PE deals by volume in the region between 2015-2020) was chosen by 40% of respondents as an attractive sector for PE investment in the short-term future.

Another 40% of survey respondents also identified Technology, which has developed into one of the highest-interest emerging sectors for private investment in Africa, as an attractive sector for future private equity investment.

Sectors associated with the rise of the African consumer, such as Consumer Goods (27%), Retail (13%) and Education (7%) showed only modest interest from Pension Fund Managers surveyed.

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