As African economies advance their “aggressive” expansion, boosting demand for financial services products such as pensions, life insurance products and retail investment funds and drawing more consumers into the formal financial sector, traditional assets under management (AuM) in 12 key markets across Africa are likely to hit $1.1-trillion by 2020.

This constitutes a sizeable proportion of the PwC-estimated global AuM of $101.7-trillion by the end of the decade, a report by professional services firm PwC has deduced.

This represented a compound annual growth rate of nearly 9.6% and pointed to the unremitting growth of traditional asset management, in particular the mutual fund industry, showed the ‘Africa Asset Management 2020’ report, released on Thursday.

“Economic growth [in Africa] has surpassed expectations and stimulated investor interest across a range of asset classes.

“Although the fund industry in Africa is, in most countries, still developing and has much to prove, global and local asset managers are likely to become more active as the industry continues to flourish,” PwC Africa asset management leader IIse French told journalists at the launch of the report.

The study examined the asset-management industry across Algeria, Angola, Botswana, Egypt, Ghana, Kenya, Mauritius, Morocco, Namibia, Nigeria, South Africa and Tunisia – countries boasting financial markets at varying levels of development and which represented a sample from North, East, West and Southern Africa.

To capture their true investment potential, each country was assessed by a range of relevant indicators, such as infrastructure, macroeconomic environment, labour market efficiency, financial market development and business sophistication, and was categorised as either an advancing market, a promising market or a nascent market.

According to the study, the global rise in the volume of investable assets that had taken place over the last two or three decades was set to continue to increase in the future and investable assets were set to be “significantly higher” in 2020 than today.

“It is interesting to note that retail investors form a small proportion of investors in asset management in Africa.

“However, the report suggests that the number of retail investors in these markets could be increased by way of education about products, encouraging a savings and investment culture and overall economic growth,” she said.

ILLIQUID CAPITAL
Noting that capital market regulation varied widely across Africa, the study observed that, although the gross domestic product (GDP) growth rate on the continent was on the rise, the savings and investment culture had not yet caught up and for the most part, capital markets remained small and illiquid.

Regulations to boost the capital markets were, however, under discussion in some countries and included measures aimed at encouraging pension funds to invest in locally-listed companies. 

Despite continental regulatory inconsistency, all aspects of the financial services sectors in Africa were expected to continue to expand to 2020 and beyond, but bank assets would likely wane in the coming years as competition was fuelled by new entrants and regulatory reforms.

“A number of banks have set up their own asset management subsidiaries in a bid to push their own proprietary products. Some of these banks are also seeking cooperation with foreign asset managers to promote their African investment strategies in other parts of the world in exchange for the promotion of other asset managers’ investment strategies in Africa.

“Banks have the best distribution network and they will likely remain the main distributors in the future,” said French.

The pension fund sectors in the 12 countries studied were shown to have steadily grown between 2006 and 2014 and were expected to continue to grow “considerably”.

As these economies matured, pensions were becoming more significant as a part of the financial services sector, although many countries still had no private pension schemes. 

The study further revealed that, while the insurance industry was also expanding, Africa had a low average penetration rate of about 3.5% of GDP, with the exception of South Africa, which was over 15%.

“As with pension funds, insurance companies outsource part of their asset management to third parties,” she held.

NO EASY EXIT
Describing private equity (PE) investment as the most “interesting” form of investment for foreign investors as a result of illiquidity in the capital markets, the firm noted that the lack of availability of exit options remained a concern for potential private equity investors in Africa.

Funders had further identified the continent’s infrastructure sector as offering hefty investment opportunities, drawing on estimations by the World Bank, which outlined the need for yearly spending of $93-billion to achieve national development targets in Africa and close the infrastructure gap.

French added that additional global megatrends, which she referred to as “game-changers”, would further drive the market and create opportunities.

“Africa’s demographic dividend, its growing middle class, its increased use of technology and its rapid urbanisation will all have a part to play in the development of the asset management industry in Africa,” she asserted.

As Africa’s population grew, PwC predicted that the resulting demographic dividend would boost economic growth, create labour productivity and economic diversification and reduce poverty rates.

“If policies are implemented to create enough employment for the enlarged workforce, the falling dependency rates should increase both savings and investment and create a substantial demand for savings products,” read the study.

Meanwhile, Africa’s expanding middle-class was expected to create further opportunities, with a recent Standard Bank report on the middle class in Africa indicating that Nigeria would add 7.6-million middle-class households by 2030, while Ghana would add 1.6-million.

This would increase demand for sophisticated financial services and investment products, such as retail investment funds, thereby significantly boosting the asset-management industry, the study noted.

The increased use of technology was also expected to change the face of the continent’s investment profile, particularly in the mobile-services sector.

“Mobile technology is also enhancing financial services across Africa by way of a nonbanked model and a banking model. However, data security may become a key concern in the future, requiring closer collaboration between telecommunications and financial regulators,” French cautioned.

In terms of the built environment, while infrastructure in Africa remained an impediment to economic growth, PwC research suggested that infrastructure spending in sub-Saharan Africa would exceed $180-billion by 2025.

The associated shortfall in government funding created opportunities for private investors to get involved either through direct investment or public–private partnerships, she argued.

REGULATORY APPEAL
Regulatory reform was, meanwhile, likely to boost economic growth and stimulate investor appetite, with changes to pension fund regulations, in particular, likely to have an effect on the asset-management industry, as public pensions were usually the largest institutional investors in many African countries.

These changes included allowing pension funds to invest in a range of assets or the establishment of a three-tier pension system.

In addition, sovereign wealth funds (SWFs) could fill existing funding gaps until the legal frameworks of African countries developed sufficiently to make them appealing to other investors.

“As large institutional investors, SWFs could provide a considerable boost to the asset-management industry in Africa, particularly because they are long-term investors who seek stable returns,” added French.

The fact that most of the funds used a proportion of their assets to make impact investments domestically, or regionally, further suggested that they would become key players in local markets.

“As asset managers look for new investment channels and competition becomes increasingly intense, understanding the characteristics of the local markets will be crucial to grasp the potential of this final frontier,” French concluded.