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February 11, 2014 5:42 pm
The nondescript building housing the South African Public Investment Corporation in a business park in Pretoria gives little indication of its power. Yet from his office inside, Elias Masilela controls nearly $150bn that he is increasingly channelling into investments across Africa.
When the Sovereign Wealth Fund Institute, a US-based consultancy, published a list of the world’s “most significant and impactful public investor executives” last year, the usual names filled the top rankings.
Sandwiched between the heads of SWFs from oil-rich Norway and Abu Dhabi were the heads of Chinese and Kuwaiti state-owned funds. But there was one standout: Mr Masilela. The chief executive of the PIC ranked 14 out of 100.
The PIC’s ascendancy marked the rapid rise of an entity that for most of its 103-year history was little known outside its home country. But it has become by far Africa’s largest asset manager and can claim to match the firepower of the best-known Middle Eastern SWFs, such as the Qatar Investment Authority.
Mr Masilela bristles at the state-owned PIC being lumped into the SWF category, pointing out that it is a pension fund manager for public employees, rather than a classic sovereign vehicle funded by state surpluses. Instead, the South African corporation bears a closer resemblance to the big public pension funds in North America, including the giant California Public Employees’ Retirement System and the Canada Pension Plan Investment Board.
Unlike its American peers, which are seen as unambiguously private enterprises managing public pension money, the PIC at times struggles to shed the perception that political considerations as much as financial ones guide its investment decisions.
Until recently, there was little interest in the PIC outside South Africa, because it invested all its money in the local market. But the body is now flexing its muscles abroad, looking particularly for opportunities in Africa. The change in focus is being closely watched by other asset managers, bankers and companies.
“They are seeing the sub-Saharan African region as a big target,” Amadou Sy, a fellow at the Brookings Institution, says. “Africa is suitable for patient money; they have a long- term horizon.”
The new strategy is already making a powerful impact in the region: its acquisition of a 1.5 per cent stake in Dangote Cement for $289m was the single biggest deal registered on the Nigerian Stock Exchange in 2013.
As the PIC expands its footprint in sub-Saharan Africa, it can expect greater scrutiny, particularly from neighbouring governments, and probably greater challenges in a region where few companies are listed and markets are fairly illiquid.
The fund will also need to be particularly sensitive to the country’s mixed image across the continent, where some South African companies have earned a tag for arrogance.
The challenges mean it is taking a gradual approach on its foreign journey, following a 2010 decision to alter its mandate to invest up to 10 per cent of its assets outside South Africa. Half of that $15bn is being spread across global equities and bonds with the help of asset managers including BlackRock. But it is with the other half that the PIC intends to get its hands dirty, as it specifically targets investments in sub-Saharan Africa.
The size of the investment vehicle, which has nearly doubled over the past five years and in 2013 posted nearly 20 per cent growth, means that any acquisition in Africa is likely to have a ripple effect, as was the case with the stake in Dangote Cement.
So far, the push beyond its borders has been modest. Mr Masilela says the fund has invested “about 6 and a half to 7 per cent” of its assets offshore – far below the foreign investment levels of other public pension funds and SWFs. But over time the offshore target may grow, allowing the fund to deploy more dollars outside its home.
“We have a huge appetite for the continent,” says Mr Masilela.
The PIC is following in sub-Saharan Africa a trail already blazed by South African businesses such as rite, a retailer, MTN, the mobile phone operator, and Standard Bank.
According to the UN, South Africa is the biggest developing country investor in Africa after Malaysia, well ahead of both China and India. South African companies have amassed $18bn in assets in the region, with big investments in mining, telecommunications, retail and banking.
Two pillars support the push into Africa. First, spreading the risks, with the managers aware that the fund is concentrated at home. Second, benefiting from African peers’ strong economic performance during a period some have dubbed “Africa Rising”.
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But there is another element: the notion that fostering stronger economic growth through investments across the sub-Saharan region ultimately benefits South Africa and its companies. “Our view is that if we invest properly and grow African markets we will be generating new business for South Africa Inc,” Mr Masilela says.
Herein lies one of the vital factors that sets the PIC apart from public pension fund managers in North America, and makes it more closely related to state-owned investment vehicles such as SWFs: an emphasis on economic development.
On one hand it is charged with managing the Government Employee Pension Fund, which accounts for about 90 per cent of its assets.
On the other, the PIC has a mandate to contribute to economic development as the South African government seeks to redress the huge economic imbalances created by decades of white rule and discrimination under apartheid and colonialism.
In fulfilling this latter part of its mandate, the PIC has invested heavily in infrastructure. It is the biggest investor in the country’s road network and has poured funds into shopping malls, affordable housing, power and health.
Mr Masilela promises to pursue a similar strategy as the PIC gradually builds up its exposure north of its borders, with one eye on returns and another on the continent’s development.
“For us, going into the rest of the continent is not driven by what your traditional asset manager would be looking for,” he says. “For us we’re driven by something over and above that. We’re driven by our ability to help grow African markets.”
As their domestic economy stumbles along, hampered by labour issues, policy uncertainty and rising costs, South African companies are leading the charge of foreign groups investing in Africa. While South Africa grew by about 2 per cent in 2013, the continent enjoyed expansion of 5 per cent, according to the International Monetary Fund – and the PIC is eager to play an integral part in that development.
So far, the PIC has splashed out $250m for a 20 per cent stake in Ecobank, a pan-African group with operations in 34 countries. As well as its investment in Dangote, it paid R2.4bn for a majority stake in Tanga Cement, a Tanzanian company.
“We think cement is going to be the next gold in Africa,” Mr Masilela says. “You develop airports, you develop pipelines, you develop telecommunications, you develop dams, you develop rail, you develop road. Which of these does not include cement?”
It is a long way from the PIC’s humble roots, which it traces back to the 1911 establishment of a “Public Debt Commissioners”. Its mandate was to manage trust funds placed in the care of the government. During the decades of apartheid, its role was largely confined to funding government budget deficits buying sovereign debt.
But just as the country has gone through a dramatic transformation since the first democratic election in 1994, so too has the PIC been thoroughly remodelled. It first began acquiring equities in the mid-1990s. In 2003, they accounted for 32 per cent of its assets. Last year, the share of equities grew to 45 per cent. By contrast, the proportion of the assets invested in fixed income securities such as government bonds has dropped from 51 per cent in 2003 to 35 per cent last year.
Its shift towards equities has given the PIC a more powerful voice in South African corporate circles. It is difficult for investors to avoid the PIC’s presence, with the fund manager a top shareholder in virtually every listed South African company.
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The PIC has raised eyebrows at home, with its activist stance sparking controversy, and, in some instances, its decision making and motives being questioned.
“They hold themselves out to be independent but there is scepticism as to whether they are truly independent of government,” says a senior South African executive. “I don’t think they are a completely neutral, commercially objective institutional fund manager that acts completely independently of policy trends in the country.”
Brian Molefe, Mr Masilela’s predecessor, won a reputation for using the PIC as a platform to chastise South African companies for the slow pace of racial transformation. Investors can be sure that the PIC will not be afraid to stand up for what it deems is in the best interests of the country.
It is a view with which Cynthia Carroll, the first non-South African executive of mining group Anglo American, would probably concur. Few have felt the PIC’s wrath so publicly. When she announced her resignation under investor pressure in 2012, the PIC, the mining company’s largest single shareholder, took the opportunity to deliver a public and withering critique of Ms Carroll’s performance.
More recently it courted controversy with opposition to an attempt by CFR Pharmaceuticals, a Chilean group, to buy Adcock Ingram, a struggling South African firm, for R12.8bn ($1.2bn) – helping to scupper the deal.
In the middle of a bitter battle CFR placed an advert in the local press in which Alejandro Weinstein, its chief executive, complained that the “criticisms levelled at our offer by the PIC have little to do with the commercial merits and are instead intended to allow a local buyer to succeed over a foreign buyer”.
Proponents of the acquisition said the PIC’s resistance sent out a dangerous message to other potential foreign investors. The PIC countered that it supported foreign investment as long as it has “predictable long-term benefits for the South African economy”, citing as examples Barclays’ acquisition of Absa bank and Walmart’s deal to buy a majority stake in Massmart, a South African retailer.
CFR dropped its bid this month after a local rival, Bidvest – in which the PIC has a large holding – secured more than a third of Adcock’s shares.
The controversy was not the first time the fund’s actions have come under scrutiny. A decade ago the PIC was forced to defend its role in the acquisition of a stake in Telkom in a deal that benefited Elephant Consortium, a group that included politically connected people.
“Their decision making is not always transparent and it’s not obvious,” another executive says.
What is clear is that any foreign company looking to do business in the South African corporate sector – and increasingly in the rest of Africa – would ignore the PIC at its peril.
State intervention: Commodities fund sovereign wealth
The Public Investment Corporation of South Africa may be the largest state-owned investment vehicle on the continent but it is not alone. More and more African countries are creating their own public pension fund schemes and setting up new sovereign wealth funds.
“This is a huge development of the [African] economy,” says Diana Layfield, chief executive for Africa at Standard Chartered, who adds that the pension fund industry is becoming “more formally” developed in Africa.
The growth in state-owned pension funds and the launch of several new sovereign wealth funds in Africa is creating an opportunity for advisers and asset managers, including UBS, Investec, BlackRock, Goldman Sachs and Credit Suisse.
On the pension funds front, diamond-rich Botswana is the only country that has launched a vehicle similar in ambition to South Africa’s PIC. The Botswana Public Officers Pension Fund manages nearly $4bn in assets on behalf of public employees. The fund, created in 2001, is already investing offshore, with more than 60 per cent of its assets targeting international investments.
The biggest trend in Africa remains the launch of new SWFs, including vehicles in Nigeria, Ghana and Angola.
The largest SWFs are in north Africa. The Revenue Regulation Fund of Algeria has $77bn in assets while the Libyan Investment Authority has $65bn under management. In sub-Saharan Africa, the largest is the Pula Fund of Botswana with almost $7bn in assets, which the country’s central bank handles with the help of eight external managers.
Several other countries operate much smaller sovereign vehicles, including the $300m National Fund for Hydrocarbon Reserves of Mauritania and the $80m Fund for Future Generations of Equatorial Guinea.
Over the past three years, oil producers Angola, Nigeria and Ghana have established SWFs, managing $5bn, $1bn and $100m respectively.
Other countries are likely to follow over the next decade, according to Mthuli Ncube, chief economist at the African Development Bank.
“Recent big oil and gas discoveries in east and west Africa are likely to give new opportunities for more African SWFs in the midterm to foster management of revenues from these new resource discoveries,” Mr Ncube said in a recent report.
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