Recent moves by pension funds in the Nordics to put money into Africa and other developing countries have highlighted not only the pressure local investment institutions are under to find higher yields, but also their motivation to back sustainable development abroad.
This month, three Danish pension funds — PensionDanmark, PKA and Lægernes Pension — joined forces with transport and logistics company A.P. Møller to launch a new infrastructure fund to invest in Africa.
The four seed investors in Africa Infrastructure Fund I together committed USD 550 million (EUR 466 million) to the fund, which will focus on transport and energy deals.
Climate Investor One
At the end of June, Norwegian municipal pensions provider KLP made an NOK 200 million investment in the fund Climate Investor One, which aims to invest in renewable energy projects in developing and emerging markets.
Torben Möger Pedersen, chief executive of PensionDanmark, says the new Africa fund is a good example of how investors can combine attractive investments for members while helping fulfil the UN Sustainable Development Goals by mobilising private capital on a large scale.
His DKK 225 billion (EUR 30.2 billion) pension fund has long looked for a way to get exposure to the growth markets in Africa, where there is a lot of economic potential but also an urgent need for upgrades to roads, rail and airports.
“For a northern European investor it is difficult to find exposure to this continent, and that’s why we’re happy we can tap into the network A.P. Møller has through the business it does in Africa,” he says.
Asset prices stretched in low interest-rate environment
Torben Möger Pedersen says this is PensionDanmark’s third infrastructure investment where it has teamed up with experienced players in different industry, mentioning the pension fund’s USD 200 million investment in shipping fund Maritime Investment Fund I announced back in March.
“In this low interest rate environment where asset prices in almost every area have become quite stretched, this is a way of going forward, and we certainly expect to continue to do this type of investment,” he says.
PKA — the manager of social and healthcare sector pension funds with total assets of DKK 250 million — expects to get a return of between 15 and 20 percent on the Africa fund investment.
PKA’s CIO Michael Nellemann Pedersen says the pension fund is open for similar investments, providing it can find projects with the same structure and with a strong partner as A.P. Møller, with experience with the African continent.
“We have positive experiences investing in Africa and for a long time we have wanted to invest more on the continent,” he says.
“With this new fund we will be making infrastructure investments in Africa and get the opportunity to provide a good return to the pension savers and at the same time make a positive difference in line with the UN Sustainable Development Goals,” he says.
Finding the right partner or manager to make investments in developing countries is vital, Michael Nellemann Pedersen says.
“Without local knowledge it’s very difficult to invest in Africa,” he says.
This insight is crucial not only for understanding the political climate in the area and the cultural challenges that might happen, he says, but also for giving the investor a better opportunity to do its due diligence.
Addition to KLP's portfolio for development investment
At KLP, Heidi Finskas, vice president corporate responsibility, says renewable energy projects are financially attractive investments and key for the transition to a low carbon economy.
“Climate Investor One offers long-term investors like KLP the opportunity to partner up with public sector and industrial expertise in order to effectively develop and finance new projects in emerging markets,” she says.
The investment is an addition to the pension fund’s portfolio for development investment, for which it as earmarked NOK 1.5 billion overall — most of which will be invested via KLP’s cooperation with development finance institution Norfund.
“The aim of this portfolio is to create a competitive return on pension savings and support the UN Sustainability Goals through investing in projects that have a development impact,” Finskas says.
Pinpointing the best partners and managers is, she says, a prerequisite for KLP doing these investments in developing countries.
“We look for both sector and market expertise, as well as shared views on the significance of development impact,” she says.
The firms must also have robust processes on environmental, social and governance issues, she adds.