Pension funds and insurance companies rarely invests in assets with unproven stable cash flows
It is astounding that some policymakers and practitioners are continuing to call for pension funds to invest in new infrastructure projects that are underpinned by a faltering economic environment. One that is prominent with financial risks, laid bare by incoherent structural, fiscal and monetary measures. This has created a public policy obstacle across Africa. One that is beginning to stifle any chance of a sustainable financial and fiscal framework that could enable pension funds to allocate equity or debt to well structured infrastructure projects.
The fact is, pensions and long–term saving capital are not developmental capital. They are liability-driven capital, and in most cases deployed based on the cash flows needed to fund future liabilities. Pension funds rarely allocate capital to assets with unproven stable cash flows (“yield”) that could be passed as dividends to the investors. These are usually new or early stage infrastructure assets with higher design and construction risks and they form the majority of the African infrastructure pipeline.
Although there has been significant breakthrough in regulatory framework allowing asset owners across the continent to allocate to alternative asset classes, however pensions investment managers are less likely to get approval to allocate capital to assets their Trustees and Investment Committees feel they cannot safely make commitments to. This decision is made all too easily bearing in mind the alternatives at their disposal – why invest in the complexities of infrastructure compared to parking their funds in low-yield bonds at a time when many are already facing serious funding shortages.
I know first–hand that African pension funds are tired of sitting on idle capital. I also know that majority of the management teams have made, and continue to make concerted efforts to diversify into alternatives. However, the principal blocks to institutions wishing to invest in infrastructure are:
- Lack of deep in-house experience which prevents Trustees and Investment Committees from safely allowing their investment teams to make commitments, and;
- An absence of available pooled investment vehicles, but rather a relatively limited range of funds and individual projects that don’t offer the diversification of risk required;
However, discussions with a selection of pension and sovereign funds suggest there is strong appetite to learn and build investment portfolios in the sector.
We have made some progress towards a solution to the first challenge so I will focus on the second. There is more than one viable solution to this second challenge. However, I will focus on one that has worked well in developed markets.
"why invest in the complexities of infrastructure compared to parking their funds in low-yield bonds"
A substantial number of these operating private sector infrastructure assets are matured and yielding stable cash–flows.
Within their portfolios are assets that will allow that to be achieved precisely. This will require a portfolio to be assembled from the infrastructure businesses of these DFIs (and some of the funds which are willing to participate), which would combine the following attributes:
- good spread of geography and sub-sector constituents;
- sufficient portfolio size and value;
- reliable yield portfolio of mostly operating assets;
- acceptable credit quality of the entities contracted to pay for the service;
This is now the most viable immediate solution for attracting African pensions and insurance capital into infrastructure assets in continent. At the same time free up much needed cash for DFIs to invest in their own economies that have suffered from too slow growth for too long.
The writer - Stanley Austin is the principal partner at Africonomie Group.
Independent and objective practitioner–led insight on institutional investing in Africa