US pension money could ‘destroy’ African PE

An influx of capital from US pension funds in Africa could ‘destroy’ the continent’s private equity market, according to investor sources.

Limited partners without adequate knowledge of the market could “penalise themselves” by driving up valuations, Jean Claude Bastos de Morais, chief executive of Zug-based investment manager Quantum Global, told Private Equity International. If global investors do not generate the returns they expected, Africa could be “banned from the US pension world”.

“They’re going to destroy not only the private equity market because they have found the wrong vehicles to invest in, but they’re also going to destroy the market itself by generating unnecessary premiums,” de Morais told PEI. “It is still [too] early to play these games, so if people come with the hat of the western thinking into Africa it’s going to be very dangerous.”

Quantum is currently seeking $2 billion from Middle Eastern investors for direct transactions in sub-Saharan Africa. The firm has deployed around $1.6 billion from its seven private equity funds, which were sourced from African pensions, national banks and sovereign wealth funds.

De Morais’ warning comes amid heightened interest for African private equity from western investors. Speaking at EMPEA’s Private Equity in Africa conference 2017 on 18 October, Kevin Njiraini, regional lead for sub-Saharan Africa private equity funds at International Finance Corporation, told delegates the development bank had seen an increasing number of US and UK LPs seeking co-investments.

Concerns of overcrowding have also been shared by US investors. At the same event, Richard Rincon, emerging markets investment officer at University of Texas Investment Management Company, said Africa is approaching the stage of having too many fund managers for the number of growth equity and buyout opportunities.

“There’s no shortage of African private equity managers,” Rincon said. “It throws up the question: ‘Are there too many today for the opportunities?’ I’d probably say no, but we’re getting there.”

Although Rincon applauded public pensions and sovereign wealth funds for having increased their investment into emerging markets private equity, he too raised concerns over the potential impact of excess liquidity from “managers that perhaps don’t have business” raising oversized funds.

“Certainly Africa’s not anywhere near that and we really encourage investments from the Nigerians and South Africans and other pensions investing in the market,” Rincon said.

“Now as it relates to US pensions … they’re flooding the market with a ton of liquidity on the large end of the spectrum to KKR’s and Blackstone’s and such. And just wait until the Japanese come into the market.”

Africa-focused private equity funds raised $2 billion in the first half of 2017, already equalling the total for last year, according to data from the African Private Equity and Venture Capital Association.