Alternative asset classes on the Ghana Stock Exchange

The revision of investment guidelines for private pension funds in 2017 has rekindled local interest in private equity (PE), giving some local PE fund managers a reason to focus their fundraising lens on private pension funds. This push, as advocated for by industry stakeholders, will enable pension funds to invest directly and make an impact on the real economy. The subsequent release of private equity guidelines by the Securities and Exchange Commission (SEC) highlighted the increased importance of this asset class. However, there is still further work to be done before the benefits of this asset class can be fully leveraged.

Private Pension Funds

The private pension industry has grown robustly, with assets of GHS1.1bn ($237.7m) in 2014 to GHS10bn ($2.2bn) in 2018, representing an average growth rate of 63% over those years. Private pension funds are expected to exceed publicly managed pension in 2019 at current growth rates. With these developments, it is crucial that private pension funds take centre stage in economic development to mirror the role played in other developed economies.

The current investment landscape seems to support the need for alternative assets. With the banking system in difficult times, equities still volatile and the corporate bond market sluggish, the introduction of alternative asset classes could not come at a better time. Indeed, government paper – until now a stable asset – has provided uncertain returns in recent times.

Next Steps

Globally, the PE market is growing rapidly, with asset under management of about $397bn in 2017. In this context, more public companies are being acquired by large global PE firms. In Ghana, the introduction of the Ghana Alternative Exchange (GAX) to provide funding for small and medium-sized enterprises is still in its nascent stages, despite the array of incentives provided by the regulator. By the end of 2018 only a handful of companies were listed on the GAX with little or no trading activities. We believe the recognition of this new asset class could be the needed bridge to provide financial and technical assistance to scale up a significant number of businesses in Ghana. A collaboration between PE fund managers and authorities of the stock exchange is necessary to provide a smooth and readily available exit option for PE portfolio companies. To provide liquidity for private pension funds, the existing PE funds in Ghana deploy debt and equity instruments to invest in portfolio companies. This is a gradual move into a more sophisticated purely equity transaction by PE fund managers.

There appears to be limited knowledge about the workings of PE by stakeholders in the pension sector, specifically trustees and custodians. A real test to the market was when the $50m Oasis Africa Venture Capital Fund, a Ghanaian based PE fund, engaged with fund managers and trustees for commitments in 2017. The conservatism displayed by some trustees and inadequate technical knowledge suggested the need for more education and capacity building to properly digest this asset class. The National Pensions Regulatory Authority (NPRA) with the SEC could lead this capacity-building initiative and provide the required guidelines to serve as a gold standard. Peculiar to pension schemes is how PE transactions are booked and recorded, as contributors exit and join the pension scheme throughout the commitment and disbursement period of a PE fund. These could be streamlined by the regulator to provide comfort for pension funds willing to participate in such investments.

For PE funds to have access to pension funds, they must be registered and cleared by both the SEC and NPRA. However, the waiting period between the regulators could take several months. This lag in approvals by various regulatory bodies in Ghana’s financial market has concerned many stakeholders, who propose proper coordination and streamlining of processes and procedures between all regulatory bodies. This will improve capital market activities, especially the issuance of alternative investment instruments such as PE funds.