South Africa’s Public Investment Corporation (PIC), the largest asset management firm on the African continent, is pressing ahead with its inclusive growth investment program. The inclusive growth program is supported by the firm’s developmental investment (DI) program, which aims to achieve two primary objectives: generating financial returns for clients as well as social returns for the rest of its stakeholders. Social returns incorporate a broad set of objectives such as job creation, empowerment of the previously disenfranchised groups of people and transformation of different economic sectors in which investments are done. Traditional asset management firms are primarily more concerned with generating financial returns and often neglect the broader socio-economic effects investments can generate.
The PIC is a long-term investor and regards sustainable investing equally essential as the need for short-term financial returns. Sustainable investing requires the PIC to consider the environmental, social and governance (ESG) issues when making investments. Considering South Africa’s macro-economic indicators, a case for this expanded investment focus by public sector institutions is apparent: unemployment peaked at 27.7% in the first quarter of 2017, the highest since 2008. GDP growth remains muted (a growth rate of 0.9% is anticipated for 2017) with the economy in a technical recession and income inequality is amongst the highest in the world, where a majority of black people remain marginalised from some economic opportunities. “We believe that sustainable wealth creation can be achieved by protecting the environment, that wealth-sharing is an insurance for sustained wealth creation process and that good governance enhances and sustains financial performance. We also believe that socio-economic transformation is critical for overall sustainability and benefit of all citizens,” says PIC Chief Executive Officer, Dr. Daniel Matjila.
With over $151.5bn in assets, the PIC invests largely on behalf of public institutions, such as the Government Employees Pension Fund (GEPF) – its biggest client, the Unemployment Insurance Fund (UIF) and the Compensation Fund (CF). The size of the PIC enables it to be then single biggest investor on the Johannesburg Stock Exchange (JSE), controlling about 10% of the exchange’s total market capitalisation.Aerial view of De Aar Solar energy farm, Northern Cape, South Africa
Investment in broad asset classes
The PIC’s investment mandate allows it to invest both in South Africa and globally. Broadly, the PIC invests in the following asset classes:
- Listed Investments (domestic): Listed equities, with 80% managed internally and 20% managed externally in the form of bonds, cash and money market;
- Unlisted Investments (domestic): Private equity, developmental investments, real estate; and
- Offshore Investments: Global listed equities, global listed bonds, rest of Africa listed investments and rest of Africa unlisted investments.
Robust risk management
Risk-taking is a permanent feature in asset management. Dr Matjila explains: “the PIC is convinced that prudent management of risks is critical for delivering on our mandate and can assist with producing stable asset and portfolio returns.”
The PIC’s risk management approach considers the following factors – Market Efficiency: Markets differ in degrees of efficiency at macro, sector and asset levels. This provides opportunities to generate excess returns over the related benchmarks through asset allocation; Time Horizon: As a long-term investor, the PIC believes that in the overtime, markets revert to their mean. Generally, its investment strategies are long-term in nature and the institution generally avoid ad hoc decision-making in pursuit of short-term returns. Diversification: the PIC’s view is that well-diversified portfolios produce stable distribution of returns and that downside-risk can be effectively minimised through portfolio diversification; ESG and sustainable investing: incorporating environmental, social and governance issues produces sustainable returns in the long-term and ensures sustainability of the investment universe; Cost: the PIC believes that managing the costs of investing can add significant value and produce excess returns. Investment strategies should utilise cost effective approaches; and Valuation and analysis: Valuation and analysis are based on the fundamentals that generally produce superior returns/risk results. Investment strategies will focus on fundamentally-based processes.
The Developmental Investment (DI) program rests on four pillars with defined focus areas. These pillars are: Economic Infrastructure; focusing on energy, commuter transport infrastructure, internet broadband, water services, liquid fuels and freight and logistics. Social Infrastructure; includes affordable housing, healthcare, education and skills development, student accommodation and rural development. Sustainability Investments is concerned with alternative energy, clean technology, recycling and investing in companies with good sustainability ratings. Priority sectors’ interest is on small, medium and micro enterprises funding, enterprise development, agriculture and agro-processing, mining and beneficiation, tourism, construction, manufacturing and clothing and textiles.PIC’s investment in Southern Farms, Northen Cape, comes to fruition
Positive outcomes of DI
The DI model has produced measurable socio-economic benefits and the PIC is convinced that continuing this investment approach will yield much more for all stakeholders. The table below shows the number of jobs created across different sectors of the economy until March 2017, to which the PIC contributed through DI program.
In line with its economic infrastructure focus, the PIC’s total direct and indirect investment in South Africa’s REIPPP (Renewable Energy Independent Power Producer Procurement Program) to date is approximately $92 million. The PIC has direct investments in 14 renewable energy projects, which generates 904.29MW of electricity. Indirectly, the PIC has invested in 40 projects, contributing 2,624.15MW to the national electricity grid. Through its unlisted investment program, the PIC has invested in three hospital with a combined capacity of 436 beds.
The mandate from the PIC’s clients directs the asset manager to look for value in the rest of the African continent, thus boosting it overall. Through this mandate, the PIC has invested in a number of projects and companies beyond South Africa. The most notable investment was in Ecobank Transnational Inc., a pan-African bank with operations in 36 African countries. The PIC’s approach to invest in the rest of the continent incorporates the following:
The PIC will invest directly in projects or companies, either in the form of unlisted debt or equity. In the case of listed equity, the PIC invests in countries on the continent with stable and growing stock markets. The PIC also invests in unlisted companies with the aim of growing and listing them. Due to the risky nature of direct investments, allocation for these type of investments is limited to approximately 20% in the initial stage of implementation.
Fund of Funds
Fund of Funds allows the PIC to invest through specialised and experienced fund managers. The aim is to deliver approximately 60% to 80% of the Africa mandate through this approach. A rigorous selection process is applied to ensure that quality and appropriate fund managers are selected as well as minimising concentration risk.
Co-investments and partnerships
This approach enables the PIC to co-invest with other institutions, thereby assisting with managing the PIC’s investment concentration risk. In this case, the PIC participates in debt syndication, exposures and equity sharing exposures with other investors. The PIC is already in partnership with experienced players across the continent that have the expertise and proven track record in private equity investments in Africa. These include developmental finance institutions (DFIs) such as Development Bank of Southern Africa (DBSA), the Industrial Development Corporation (IDC), the International Monetary Fund (IMF), the African Development Bank (AFDB) and other leading African banks such EcoBank.