Leon Greyling, Chairman of the Investment Committee at Motswedi Economic Transformation Specialists
In an era of rapid urbanisation, climate challenges and technological disruption, emerging economies stand at a crossroads. Nations like India, Brazil, and South Africa grapple with infrastructure deficits that hinder sustainable development. Roads crumble, energy grids falter, and digital divides widen, stifling economic potential. Here, private capital – particularly from pension funds – emerges as a vital catalyst. By investing in private markets (such as private equity and debt) and infrastructure projects, these economies can bridge funding gaps, foster innovation, and deliver long-term returns for savers. This isn’t just an opportunity; it’s a necessity for resilience and prosperity.
Private markets offer compelling advantages over traditional public investments. Unlike volatile stock markets, private equity allows investors to back high-growth ventures in sectors like renewable energy or agribusiness, often yielding superior returns. Infrastructure investments – think toll roads, ports, shopping centres in rural areas or solar farms – provide stable, inflation-linked cash flows that match the long-term liabilities of pension funds. For emerging economies, where public budgets are strained by debt and competing priorities, mobilising private capital fills critical voids. The World Bank estimates a $1-1.5 trillion annual infrastructure gap in developing regions, with private funds essential to close it. In South Africa, government estimates this number to be R1 trillion. Such investments drive job creation, enhance productivity, and stimulate GDP growth. In emerging markets, private debt can support small and medium enterprises (SMEs) that banks overlook, unlocking entrepreneurial ecosystems, and creating jobs.
Diversification is another key benefit. Emerging economies are prone to commodity price swings, currency fluctuations, and geopolitical risks. Allocating pension assets to private markets reduces exposure to these volatilities. Global studies show that portfolios with 10-20% in private assets exhibit lower risk and higher Sharpe ratios. Moreover, these investments align with sustainable development goals (SDGs). Private equity in emerging markets can steer capital toward green infrastructure, addressing climate vulnerabilities while generating impact. For instance, funds targeting water sanitation or affordable housing not only yield financial returns but also improve living standards, creating a virtuous cycle of social and economic upliftment.
Globally, pension funds recognise this potential. Institutional investors in developed nations allocate 20-30% of assets to private markets and infrastructure, reaping benefits from diversified, high-yield portfolios. In the U.S. and Europe, funds like CalPERS or Norway’s sovereign wealth fund invest heavily in private equity (around 13%) and infrastructure (4-7%), boosting overall returns amid low-interest environments. This trend is accelerating: a 2024 survey indicated 40% of global schemes plan increases in infrastructure allocations. Emerging markets could follow suit, but many lag, missing out on compounding growth.
South Africa exemplifies this under utilisation. With a R5 trillion pension industry, the country’s funds allocate less than 3% on average to private markets and infrastructure – far below the global benchmark. Estimates peg alternatives at just 2%, with infrastructure under 2.7%. This conservative stance contrasts sharply with peers; even in Africa, some funds allocate more to domestic development.
Why such reticence? Regulatory hurdles play a role. Until recent amendments to Regulation 28 of the Pension Funds Act, limits capped private equity at 10% and infrastructure at lower thresholds. Now, funds can allocate up to 15% to private markets and 45% to infrastructure, but adoption remains slow. Liquidity concerns deter trustees: private investments are illiquid, locking capital for years, which clashes with short-term performance pressures. Risk aversion is amplified by South Africa’s economic woes – load shedding, high unemployment, and fiscal constraints make local projects seem precarious. Pension managers often prefer government bonds or offshore assets for perceived safety, despite strong historical performance from private markets.
Many pension funds lack mandates for impact investing, prioritising “fiduciary duties” over developmental goals. Cultural factors, like a preference for familiar public markets, also persist. I’m calling it……its laziness and failure to think long-term. Trustees (and their consultants) have to just simply apply themselves and engage the opportunity.
This under allocation is a missed opportunity: South Africa’s infrastructure needs – estimated at R4.8 trillion by 2030 – could be partly met by pension capital, yielding 10-15% p.a. returns while addressing energy and transport bottlenecks.
Policymakers could incentivise shifts through tax breaks, co-investment vehicles, and risk-sharing mechanisms like blended finance. But the case for shouldn’t really require that. Education for trustees on private market due diligence is crucial. Successful models exist: Nigeria’s pension funds have increased infra allocations via public-private partnerships, spurring growth. Yes, it’s time to see innovation…and collaboration.
In conclusion, emerging economies like South Africa cannot afford to sideline private capital. By ramping up pension investments in private markets and infrastructure, they can ignite inclusive growth, hedge risks, and secure retirees’ futures. The global disparity underscores the urgency – it’s time to invest boldly for tomorrow’s prosperity.
ENDS
