Africa: The LP Perspective from New York

At the African Private Equity and Venture Capital Association’s annual conference in London last year, New York State Common Retirement Fund chief investment officer Vicki Fuller announced the $180 billion pension plan’s intention to invest up to 3 percent of its assets – or around $5 billion – in Africa in the next five years.

The pension fund’s private equity programme currently stands at around $14 billion, of which the majority is invested in the US and Europe, with an allocation of around 10 percent to Asia.

Its nascent emerging markets programme includes two commitments to sub-Saharan Africa funds made last year: $100 million to Helios Investments III and $85 million to ACA’s fourth fund, which is in market targeting $600 million.

Brian Hughes, who heads the private equity programme at NYSCRF, says the pension fund is looking to grow its exposure to emerging markets.

“The job of private equity is to add incremental return to the portfolio in a world of very low yields and low returns,” he says. “We are looking globally to enhance that return. We have an actuarial target of 7 percent a year; that’s pretty difficult to do these days, and private equity helps achieve that target.”

Having made two commitments to funds at the larger end of the sub-Saharan Africa market, Hughes says it will likely concentrate on smaller funds for subsequent commitments.

“We may need the help of a fund of funds or a separately managed account,” he says. “The problem that we have is with a very small staff and a lot of capital that we need to invest each year. We have to make sizeable commitments, and in emerging markets generally there are a lot of funds that are just too small for us to target directly.”

The pension fund researched sub-Saharan Africa for several years before making those commitments in 2015, dedicating a team member to carrying out due diligence on the funds and developing NYSCRF’s expertise on Africa.

One of the reasons that the broader US public pension fund community hasn’t wholeheartedly bought into the Africa growth story is the lack of reliable track record, which makes it tricky to diligence managers.

“Although some of our diligence was focused on the opportunity in Africa, and sub-Saharan Africa in particular, the quality of the management team was paramount,” Hughes says.

“In the case of ACA and Helios, we believed the management team was of great quality. For instance, the Helios team had prior experience at TPG; we are also an investor with TPG on a global basis, so certainly that gave us some confidence.”

Macroeconomic headwinds and geopolitical risks are also cause for concern. Hughes says that the fund “understand[s] the risks” of investing in the region and keeps a keen eye on any developments, but that “it’s a very large market” with “substantial opportunity”.

“In general in emerging markets, the calculation that is driving the interest is the development of the consumer society, the development of the middle class, and we think that will drive the economy in future years as it does in the US currently.”