Flipping the Script: Turning African Pensions into Private Market Gold

As I sat in a session at the recently concluded “Women in Private Markets Summit” by Private Equity International in London; this one themed “The Future of London as a Global Financial Centre”. I found myself pondering a particularly pointed question: “How can we build an ecosystem where companies start, grow, and scale?”

Now, the UK might be brimming with suggestions for this, but my mind wandered; no, sprinted back to Nigeria and the broader African context. What would our response to this question look like? One answer stood out during the session: improving access to capital. That, dear reader, is the focus of this post.

It’s no secret that one of the loudest cries from Africa’s small and medium enterprises (SMEs) is the lament of “lack of funding.” The consensus is that Africa needs patient, risk-tolerant capital, not the impatient capital that prioritizes quick returns. But here’s the kicker: where does this magical patient capital come from?

According to the World Intellectual Property Organization (WIPO), Africa accounted for a mere 0.8% of global venture capital (VC) deal value in 2023, a modest climb from 0.1% in 2017. Meanwhile, Northern America held steady with a whopping 50% share in both years. I do not have data on the sources of funding in various regions. However, my guess is most of the funding in North America venture ecosystem is primarily from North America. So, spoiler alert: there’s no cavalry coming to save us with their patient capital. Sure, they might toss some in, but if Africa wants a proper seat at the global economic table, we need to start with what we already have.

Institutional investors (Family offices, Pension Funds, Sovereign wealth funds, Endowments and Foundations e.t.c) represent a significant source of funding in global private markets. Cue the pension funds. Africa’s burgeoning population promises a growing pension industry, and here’s a bold thought: how about we deploy a decent chunk of our pensions into private markets-venture capital and private equity?- Given Africa's infrastructural deficit, there is typically a focus on allocating capital to infrastructure in Africa. As a response to the pointed question, the UK is undergoing pension reforms, the current chancellor Rachel Reeves has themed it the “biggest pension reform in decades,” aiming to consolidate 86 council pension schemes into “megafunds,” poised to pump billions into local energy, tech startups, and public services.

In Africa, the regulatory groundwork exists. Take South Africa’s Regulation 28: pension funds must invest at least 35% of assets in local equities and infrastructure. Nigeria’s 2014 Pension Reform Act channels pensions into government securities, corporate bonds, and infrastructure funds. Kenya’s Retirement Benefits Authority (RBA) mandates that 90% of pension fund assets stay local, focusing on similar areas.

Here’s where I think we need to tweak the playbook:

1. Explicit minimum allocation to venture capital: The current regulation by National pension commission for pension funds in Nigeria have a maximum limit allocation to Private Equity as an asset class. However no explicit recognition of Venture Capital as an asset class- Lets face it, venture is where we need to start to fund before we speak of growth equity which is where Private Equity funds play.

2. Reducing the maximum limit of allocations to government bonds and cash (money market funds): Let’s be real, high interest rates are crowding out private sector investments. Why take risks when juicy government bonds and money market yields beckon?

All of this can be achieved within the established risk parameters and strategic asset allocation guidelines of the respective pension funds.

Investors chase one thing: returns. To draw them in, Africa needs winners- funded, scaled, and maybe even IPO’ed locally. Once we have them, the global narrative shifts. Or as we say in Nigeria, “na them go dey rush us”- everyone will be clamoring to get a piece of the action.

What do you think? Am I onto something, or am I waxing philosophical here? Share your thoughts-I’d love to hear from you!

Peep a few pictures from the session.

Regards