Pension funds, PE firms get green light to co-invest

The introduction of a framework that allows Pension Fund Administrators (PFAs) co-invest with private equity (PE) firms will offer players in the industry an opportunity for diversification and reduce concentration of pension funds in Federal Government bonds.

Industry players that have received the framework described it as a welcome development that will enable them to co-invest with PE firms even in unlisted securities.

Averagely, about 70 percent of pension assets are domiciled with federal and state government securities by PFAs, which had continued to lament the dearth of investible assets.

Out of N13.8 trillion of assets under management recorded by the pension industry in February, Federal Government securities accounted for 62 percent or N8.5 trillion, according to PenCom.

PenCom, in a recent framework sent to PFAs titled ‘Operational Framework for Co-Investment by Pension Fund Administrators’, said Nigeria’s pension fund assets had remained concentrated in Federal Government securities as the rapid growth of the assets had not been matched by a corresponding increase in domestic investment outlets.

The commission said the current concentration of pension assets in government securities could lead to distortions in asset prices within the domestic market as pension funds continued to chase the same limited investible asset classes within the domestic market.

Dave Uduanu, managing director/CEO of Sigma Pension Limited, said the framework that will allow PFAs to co-invest with PE firms is a step in the right direction.

He said: “We have been investing in private equity on listed securities, but the framework now suggests that we co-invest with the PEs we are used to, having invested in them for some time and also exited.

“The idea is to ensure that we do not put pension money in PEs that fly by night and could disappear anytime. For me, it is a welcome development. In fact, we pushed for it because it will give us the leverage to diversify our portfolio and reduce our concentrations in Federal Government bonds.”

PenCom said this would give PFAs more investment outlets and encourage the diversification of pension fund portfolios.

According to the commission, innovative solutions are therefore required to address the dearth of investment outlets and encourage the diversification of pension fund portfolios.

It noted that one of the asset classes with the lowest asset allocation by pension funds is private equity. This asset class has remained significantly below the maximum limits of 10 percent for Fund I and 5 percent for Funds II & VI Active.

The commission said: “Consequently, investing in specific transactions under a co-investment arrangement has been identified as a viable option to improve pension funds’ allocation to this asset class.

“Co-Investing alongside the main PE Fund is expected to provide PFAs flexibility and greater choice in the type of projects/companies in which pension funds are invested, thereby further enhancing returns and increasing exposure to PE.”

A joint report by African Private Equity & Venture Capital Association (AVCA) and Pension Fund Operators Association of Nigeria (PenOp), said 75 percent PFAs interviewed planned to accelerate or maintain their current pace of capital commitments to African PE in the next five years, citing a desire for portfolio diversification and performance as the most important factors driving their investment plans.

Speaking on the publication, Abi Mustapha-Maduakor, CEO of AVCA, said increasing interest in Africa’s private equity industry from domestic and international investors alike underscored the need to analyse the perceptions and concerns of institutional investors to promote an open dialogue on the continent’s unique business environment.

“This joint publication exemplified AVCA’s commitment to championing private investment in Africa: bridging the knowledge gap between industry stakeholders by providing topical, informative research on the opportunities private equity has to offer Nigerian pension funds,” Mustapha-Maduakor said.

Oguche Agudah, the CEO of PenOp, had said recently that local pension funds had expressed a desire to increase their allocation to private equity and more impactful investments.

He, however, said there were a number of bottlenecks that restricted them, saying, “The partnership with AVCA helps us to work with industry stakeholders to identify and address these bottlenecks for our mutual benefit, and the benefit of the local economy.”

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The objective of the framework is to establish standards and procedures for co-investment of pension funds by licensed PFAs, to further enhance the diversification of pension fund assets under management, and to improve returns on pension fund investments in PE.

The framework says PFAs shall only enter into co-investment arrangements for a specific transaction(s) following a PFA’s investment in the main PE Fund.

It says: “Co-Investment arrangements shall be made through Special Purpose Co-Investment Vehicles (SPCV). The SPCV shall be set up by the General Partner (GP) of the PE Fund with clearly defined legal status, rights and rules of the SPCV.

“The Governance Agreements under co-investment shall clearly delineate the roles and responsibilities of the GP and the investors in the co-investment arrangement. This includes governance rights, risk management, pre-emptive rights, liquidity and exit arrangement in the co-investment arrangement.”