FSD: Catalysing local capital in Africa

In February, FSD Africa launched the Africa Private Equity and Private Debt Programme in partnership with regional private market associations. Director for capital markets, Evans Osano, outlines the initiative’s aims.

Why did FSD Africa launch the programme?

The overarching goal is to support the mobilisation of long-term finance in local currency to fund Africa’s developmental and economic priorities. We believe private capital markets have a critical role in deploying capital where it is needed most in Africa into the real and social sectors, supporting entrepreneurs and helping create jobs, providing basic services and building a sustainable future for the continent.

Given the relatively small size of the public capital markets in Africa, private capital markets can be a useful complement. But, in Africa, private equity and private debt markets have hitherto been dominated by development finance institutions and foreign investors with very limited participation by domestic institutional investors.

Pension funds, the largest institutional investors in the continent with over $500 billion of AUM, are significantly biased towards traditional asset classes, with less than 1 percent allocation in PE or debt in most cases. We believe that by allocating more capital to the private markets, African pension funds can improve their risk-adjusted returns while contributing to the economic transformation of the continent.

This is the most ambitious initiative to promote private capital markets to date in Africa. FSD Africa has committed £2.2 million ($3.1 million; €2.6 million) to this initiative.

What will the programme entail?

It seeks to develop the market by: developing the enabling environment – eg, by working with regulators to put in place regulatory provisions and/or incentives to allow for investments in private capital markets by relevant institutional investors; supporting demonstration transactions and/or designing appropriate structures or vehicles to allow for investments in private capital markets; training of relevant stakeholders; research; advocacy; and impact reporting. It will facilitate growth in a way that is uniquely African in character and is genuinely tailored to the local context.

How will FSD Africa leverage partnerships?

Partnerships with private market associations will enable FSD Africa to leverage their networks and memberships, on-the-ground knowledge and presence to identify and work towards addressing the most intractable issues affecting their respective markets in line with the programme’s mandate. The partnerships will also enable FSD Africa to leverage the advocacy mandates of the market associations to drive discussions on challenges/market failures and opportunities in private capital markets. This will ensure identification of solutions to the challenges/market failures and broad-based understanding by institutional investors and other relevant stakeholders in a way that aids decision making with regards to investment in such markets.

What opportunities do private markets present to African institutional investors?

African public markets are relatively small and do not provide sufficient exposure to the real and social sectors in the continent. This also limits diversification of investor portfolios. Private markets would permit institutional investors to gain exposure to markets and investment strategies that cannot be accessed through traditional asset classes. In addition to potential attractive risk-adjusted returns, private market investments allow clients to diversify their portfolios by investment strategy, portfolio manager, industry sector, geography and liquidity needs.