June 9, 2013, By Klaus Wille
Africa is experiencing the strongest growth in new sovereign wealth funds in the world as the continent’s nations are amassing commodity revenues and foreign-exchange reserves, according to JPMorgan Asset Management Inc.
During the past two years, 15 state funds have been set up or are being considered in Africa, Patrick Thomson, the global head of sovereigns at JPMorgan Asset said. The region will see more starting in the coming years, he added.
With commodity prices rising, African countries are putting their surpluses into government-owned funds designed to manage a country’s wealth for future generations. Angola set up its $5 billion state fund in October, Uganda said in April it plans to create a sovereign fund, and Nigeria, Africa’s biggest oil producer, inaugurated its $1 billion fund eight months ago.
“We expect the number in Africa to grow further over the coming years,” Thomson, 45, said in a telephone interview from Hong Kong on June 6. There are two main reasons why more state funds are being set up in Africa, “it’s the growth in commodity prices, and it’s the growth in foreign exchange reserves.”
Africa is catching up with many Asian and Middle-East countries that already have a state fund, Thomson said. Latin America will see the second-strongest growth in the number of new funds, he said, without elaborating.
Thomson, who advises state entities like wealth funds, central banks and pension funds, declined to name particular countries as candidates for new state funds, citing client confidentiality.
The annual average price of copper has more than quadrupled over the past decade, while the average cost of oil surged almost four times, bolstering the assets of African state funds. The average price of gold, for which South Africa is the continent’s biggest producer, surged more than 300 percent since 2003.
Africa’s biggest sovereign wealth fund is Algeria’s $77.2 billion Revenue Regulation Fund, according to the Sovereign Wealth Fund Institute. It is followed by the $65 billion Libyan Investment Authority and Botswana’s $6.9 billion Pula Fund.
Tanzania, holder of the second-largest natural-gas resources in East Africa, is considering starting a state-owned investment vehicle using income earned from the fuel, President Jakaya Kikwete said in August.
Zimbabwe’s government in December said it created a sovereign wealth fund after it compelled foreign-owned companies to sell 51 percent stakes to Zimbabweans under its indigenization program.
Mozambique is mulling starting an investment pool, Massimiliano Castelli, head of strategy at Global Sovereign Markets at UBS AG (UBSN), said in March. Sierra Leone’s president Ernest Bai Koroma proposed setting up a state fund with the proceeds from the mining industry, Reuters reported in October.
Sovereign funds around the world are currently shifting their investments from the developed world into emerging-market assets, Thomson said. They are buying mostly debt and equity in public markets in developing regions, he added without quantifying.
State funds are also increasingly joining forces in their investments, partly investing in alternative assets such as infrastructure and real estate including airports and utility companies, Thomson said.
The wealth funds of Russia and China in June 2012 started a joint private-equity fund mainly targeting transactions in Russian forestry, logistics and agriculture.
Sovereign funds’ investments in alternative assets may face less competition from other investors, including pension funds and insurers in developed markets, that face increasing constraints due to tightening regulations, Thomson said.
European Union regulators are setting up new rules, known as Solvency II and aimed at making insurers safer by harmonizing the way they allocate capital against the risks they take.
“Solvency II is making insurance companies change their investment behavior in order to meet regulation,” he said. “That provides the opportunity for sovereign funds to invest in assets that insurance companies used to invest in and now perhaps they are finding it more difficult under new regulation.”