The introduction of a framework allowing pension fund administrators (PFAs) to co-invest with private equity (PE) firms will provide industry players with an opportunity to diversify and reduce the concentration of pension funds in federal government bonds.
Industry players who have received the framework have described it as a welcome development that will allow them to co-invest with private equity firms, even in unlisted securities.
On average, about 70% of pension assets are domiciled in federal and state government securities by PFAs, which had continued to lament the shortage of investable assets.
Of the N13.8 trillion in assets under management recorded by the pension industry in February, federal government securities accounted for 62% or N8.5 trillion, according to PenCom.
PenCom, in a recent framework sent to PFAs titled “Operational Framework for Co-Investment by Pension Fund Trustees,” said that Nigerian pension fund assets had remained concentrated in federal government securities, with rapid growth assets that has not been accompanied by a corresponding increase. in national investment outlets.
The commission said the current concentration of pension assets in government securities could lead to asset price distortions in the domestic market as pension funds continue to seek the same limited investable asset classes in the domestic market.
Dave Uduanu, Managing Director/CEO of Sigma Pension Limited, said the framework that will allow PFAs to co-invest with private equity firms is a step in the right direction.
He said: “We have invested in private equity on listed securities, but the framework now suggests that we are co-investing with the PEs we are used to, having invested in them for a while and also exited.
“The idea is to make sure that we don’t put pension money in PEs that fly at night and could disappear at any moment. For me, that’s a welcome development. In fact, we pushed for this 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 opportunities and encourage diversification of pension fund portfolios.
According to the commission, innovative solutions are therefore needed to address the shortage of investment opportunities and encourage the diversification of pension fund portfolios.
He noted that one of the asset classes with the lowest asset allocation by pension funds is private equity. This asset class remained well below the maximum limits of 10% for Fund I and 5% for Funds II and VI Active.
The commission said: “Therefore, investing in specific transactions under a co-investment agreement has been identified as a viable option to improve the allocation of pension funds to this asset class.
“Co-investing alongside the main private equity fund should provide PFAs with flexibility and greater choice in the type of projects/companies in which pension funds are invested, further improving returns and increasing the private equity exposure.”
A joint report by the African Private Equity & Venture Capital Association (AVCA) and the Association of Pension Fund Operators of Nigeria (PenOp), said 75% of surveyed PFAs plan to accelerate or maintain their pace capital commitments to African private equity over the next five years, citing the 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 the growing interest in Africa’s private equity industry from domestic and international investors has highlighted the need to analyze perceptions and the concerns of institutional investors in order to promote an open dialogue on the continent’s unique activity. environment.
“This joint publication exemplifies AVCA’s commitment to championing private investment in Africa: bridging the knowledge gap between industry stakeholders by providing timely and informative research on the opportunities that private equity has to offer Nigerian pension funds,” Mustapha-Maduakor said.
Oguche Agudah, the CEO of PenOp, said recently that local pension funds have expressed a desire to increase their allocation to private equity and more impactful investments.
He said, however, that there were a number of bottlenecks that limited them, saying: “Partnering with AVCA helps us work with industry stakeholders to identify and resolve these bottlenecks in our mutual benefit and for the benefit of the local economy.”
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The objective of the framework is to establish standards and procedures for the co-investment of pension funds by licensed PFAs, to further improve the diversification of pension fund assets under management and to improve investment returns. pension funds in private equity.
The framework stipulates that PFAs will only enter into co-investment agreements for one or more specific transactions following a PFA’s investment in the main PE fund.
It says: “Co-investment agreements must be entered into through special purpose co-investment vehicles (SPCVs). The SPCV is formed by the General Partner (GP) of the PE Fund with clearly defined legal status, rights and SPCV rules.
“Co-investment governance arrangements should clearly delineate the roles and responsibilities of the general partner and the investors in the co-investment arrangement. This includes governance rights, risk management, pre-emptive rights, liquidity and exit agreement in the co-investment agreement.