Governments in the region are pushing for more high impact infrastructure investments, but public resources are increasingly under pressure. Kenyan Pension Funds Investment Consortium (KEPFIC) is a leading initiative in Africa investing in infrastructure and private equity with potential for replication.
Building on an initial African Sovereign Wealth and Pension Fund Leaders Forum meeting hosted at the 2017 Africa investor (Ai) Infrastrurcture Investment Summit in Durban, MiDA Advisors, an investment advisory firm that assisted in the formation of KEPFIC, is working with Batseta, South Africa’s largest trade organization of pension funds, to replicate some of the achievements learned from the KEPFIC model.
As African debt levels shake regional economies and strain government coffers in the midst of the COVID-19 pandemic, the urgency of marshalling local savings for vital infrastructure is clear. Dwarfed in size by global institutions and commercial lending, however, African institutional investors have been slow to fully harness their market potential to fund infrastructure and other high impact equity investments.
What would happen if international development agencies used foreign assistance funding to help local investors access the markets and co-investment opportunities they need to propel their communities to prosperous, self-reliant futures?
Buey Ray Tut, a South Sudanese refugee and founder of Aqua Africa, has argued for years that foreign assistance funding models have merely progressed from “give a man a fish” to “teach a man to fish” approaches. “Why don’t we take that one step further?” he asked. “Why don’t we help the person create a market…so he could sell the fish [and be] aid independent?”
The international development community has increasingly responded, creating durable models with potential for replication. The United States Agency for International Development (USAID), for example, has helped Kenyan institutional investors play a bigger role in financing the country’s infrastructure—the transportation, water, sanitation, energy, and housing projects integral for growing thriving and inclusive societies. Kenya currently faces an infrastructure investment gap of approximately $2.1 billion annually. Historically, the nation’s infrastructure has been funded by the public sector, increasingly under pressure to channel scarce resources toward blunting the impact of the pandemic on livelihoods and jobs.
In 2017, USAID’s Mobilizing Institutional Investors to Develop Africa’s Infrastructure (MiDA) Initiative and the World Bank began a partnership to lay the groundwork for enabling local pension funds to invest in alternative asset classes, such as infrastructure and private equity.
“The World Bank had been working in Kenya to reform the regulations around infrastructure investing,” says Aymeric Saha, who served as the managing director of the MiDA Initiative until its conclusion last year. “It was the right enabling environment for MiDA to engage with institutional investors. Kenya’s pension funds had been growing quickly, and their portfolios were highly concentrated in government securities and a few locally traded equities. They needed to diversify.”
Investing in infrastructure has generally yielded attractive returns for investors. However, these projects require expensive structuring and due diligence fees, causing most asset owners worldwide to stay away from the asset class.
“We decided that the best way to move forward was to support the creation of a consortium of local institutional investors that would enable them to jointly explore investment opportunities in alternative assets,” says Saha.
In 2018, six local funds formed the Kenyan Pension Funds Investment Consortium (KEPFIC), which allows the funds to share the costs, knowledge, and due diligence teams necessary for exploring these opportunities. It also enables greater mobilization of capital and increased bargaining power. As of 2020, 12 local funds have joined KEPFIC, and another eight are in the process of joining.
USAID, through the Kenya Investment Mechanism, is assisting KEPFIC with the establishment of a secretariat and a legal structure, and MiDA Advisors, an advisory firm established by Saha and others to continue the MiDA Initiative’s mission, is helping to ensure that KEPFIC has the highest standards of governance and a strong investment strategy.
KEPFIC will begin the raise for its first shared fund this year, starting with $2 million commitments from its founding members. In partnership with USAID INVEST, MiDA Advisors is assisting KEPFIC with the selection of its asset manager.
“Facilitating co-investment with U.S. pension funds is one of KEPFIC’s long-term goals, and that requires having an asset manager who can address the concerns of both local and U.S. funds,” says Saha.
Some KEPFIC members have already begun investing in alternative assets. Kenyan Power Pension Fund and Britam Insurance recently made commitments to Everstrong Capital, a U.S.-based asset management firm focused on investing in African infrastructure. Such investments have a significant impact on the local communities.
“The Everstrong Kenya Infrastructure Fund is designed to mobilize capital which is critical in meeting the funding gap for infrastructure in Kenya and selected other regions of East Africa,” explains Philip Dyk, managing partner at Everstrong Capital. “Investments in infrastructure provide diversification to fund investors because of the predictable, long-term revenue and low correlation to economic cycles. Energy, transport, communications, and water utility assets provide essential services that are used even during times of uncertainty, such as during the COVID-19 pandemic.”
Other KEPFIC members— KenGen Defined Contribution Scheme and other pension funds—have approved commitments to a private equity fund managed by Development Partners International (DPI), a London-based pan-African private equity firm. DPI invests in companies that benefit from the growth of Africa’s emerging middle class and provides the technical assistance needed to ensure that each portfolio company and its employees thrive.
A meeting between MiDA and Batesta, South Africa’s largest trade organization of pension funds, hosted at the 2017 Africa investor (Ai) Infrastructure Investment Summit in Durban, throught a partnership with the African Sovereign Wealth and Pension Fund Leaders Forum, is now bearing fruit for expanded opportunities. MiDA Advisors is working with Batseta to help kickstart the formation of a South African consortium initiative, replicating aspects of the KEPFIC model. South Africa’s funds will seek solutions tailored to the country’s larger and more advanced capital markets, financial institutions, and infrastructure developers.
The appeal and adaptability of consortium models makes them a viable option for other African nations seeking to mobilize local resources for financing their infrastructure needs. “Establishing these consortiums definitely speaks to using development assistance as a means for creating self-reliance,” says Saha. “Local pension funds will now be effectively investing local savings in sectors that are creating jobs for people, having significant impact on the economic development of Africa, and producing humanitarian outcomes for local communities.”
By Vanessa Holcomb Mann, Senior Investment Advisor, and Emily Langhorne, Specialist, USAID INVEST