The sweetest gig in town

I was talking with a friend who runs a Private Equity Fund. This friend was railing no end about how hard his line of work is. He and his team have to review countless deal opportunities, most of which are completely valueless. Then they have to find the right ones, find a way to agree deal terms, structure risks away, invest capital, guide the investee to optimise, and then find a way to exit and cash out. My answer to him was that he should have simply aimed to be a Pension Fund Manager.

Nigerian Pension Fund managers have a good gig going. The government requires us to give them a good chunk of our income every month, and they do not have to do much other than to not lose it.

As it stands, the guidelines regulating how they should invest the money is very much more about keeping the contributions safe and little else. As long as the PFAs don’t lose the money, they are fine.

So they keep the money in bank vaults in short term deposits that they roll over. They buy government bonds. They buy the odd shares. And that is it.

To manage pension funds seems from outside quite simple. Sit in your office, wait for banks to come and market you. Drink coffee. Talk to the young marketers on variable pay that you send out to bring new companies into the pension net. Drink more coffee. Talk to your Something Capital people who have come to ‘market’ you to buy government bonds. Chat with your investment committee to decide whether to reduce your bond portfolio from 97.4% to 96.9%. Buy more bonds because, heck, wetin man go do. Check that your Assets Under Management have reached 3 trillion. Write a bad speech to gloat about it at the next conference at Eko Hotel. Go home. good day. It’s a good gig. If you can get it.

As it is, in real terms, after you take out the effect of inflation, the PFAs will appear to be doing no better than keeping our pensions under a pillow.

Day 2 at the PFA office. This pesky opinionated blogger guy has come, quite impertinently, to tell you that the maturities of your liabilities (payouts to retirees) do not match the horizon of your assets. 60% of your contributors are under the age of 40. They will retire in 25 years. Nigeria’s demographic distribution means that over time, it will be an even bigger proportion of your contributors who are under the age of 40. But you’re all invested in short term securities. This is not what best practice or common sense dictates.

The guy won’t shut up. As he’s passionate about infrastructure, he asks why you’re not investing in infrastructure assets like a 30 year road concession guaranteed by the same government you can’t stop selling bonds to. You knew this one was coming, people tend to ask you this question a lot and it’s starting to really grate. You tell him that you can’t do anything about the “lack of suitable investable vehicles with low risk profiles and sufficient comfort”. If you don’t see bankable assets, you can’t invest in them. Infrastructure is too risky (WHAT??!!??) and look I make double digit nominal returns. “Is it because I did not invest in your fund, and that your project”? You put him in his place.

Blogger guy goes on to say that you’re not growing his assets. He will retire, if God doesn’t have other ideas in 30 years time. You’re no better than keeping money under a pillow, he brashly says again. If you continue to not beat inflation, you will give him a big bag of money at retirement but it really will not go a long way. He might as well be investing his retirement money himself.

We’re building up a fat pool of savings, the biggest that can be set to work in this economy. This is a fantastic state of affairs in a country that simply does not generate savings or form capital at anything approaching adequate levels.

The Pension Reforms of 2003–04 which surreptitiously took the yam from the goats was brilliant and might be one of the best pieces of reform in developing country history. Pension money used to be the best gig in town for the thieves in government and the civil service. The goats just simply ate the yam, every single time. People just outright stole pension money, again and again and again for decades. This reform, led by Fola Adeola, simply changed the paradigm. The goats did not know the game had changed and they did not even oppose it. When the reform kicked in, they were Sunday roast. The game had mostly ended.

We have moved from a situation of theft, to building the largest pool of investable capital this country has every had. The euphoria of that has prevented many people from seeing the problem that is being created in that sector. Capital sitting dormant and not getting returns was not the goal or vision of pension reforms. The regulators and the PFAs have to realise this fast. To be fair, the PFAs are getting it. We see a slow uptick of diversification (dat word don reach hia sef), and we see more sophistication in the processes, the asset classes, the investment philosophy and the investing personnel. We’re seeing smart investments in real estate in a country that has a mega housing deficit. We’re seeing the first Naira-denominated PE funds emerge, raised from PFAs, which is the most exciting development in Nigeria’s financial sector since Pension Reforms.

Nigeria is caught in a paradigm warp. We are in an era where the stock market is a sick baby, that the best performing companies in Nigeria do not want to come near. There is no mortgage market with the cost of capital being what it is. Insurance companies have brilliant prospects but most of them are terrible at managing their investment portfolios and at developing products. The Investment Banks mostly and mainly do not make money. PE Funds do good deals but there are too few of them and they have too little capital. The banks find it easier to lend money to government.

The new paradigm for the financial sector is innovation. There are so many innovations that are necessary and possible, that will create many more asset classes and investment plays. Yet we have seen little innovation.

The new paradigm for the financial sector is not just innovation, it is problem-solving and model thinking. The single largest problem that the sector faces is finding investible assets. The problem is good old origination.

This problem manifests in banks not finding companies to lend money to that fit their lending criteria. Or is it the banks that can’t find lending criteria to fit the companies? It manifests in insurance companies that can not sell policies in an environment as risky as this. It manifests in PFAs that genuinely, to be perfectly fair, do not have a large investable universe. It manifests and manifests but there is no model thinking (one day I will explain this).

The US Venture Capital firms (VCs) did very good business in creating ventures that they got extraordinary exits from. At some point they realised that they simply did not have enough new ventures to invest in, what with the huge number of new VCs that had been attracted to the above-normal returns. What did they do? They created incubators and accelerators and thus assured that there would irreversibly be an unending slew of new bright young things with big ideas and big balls to create assets the VCs could invest in.

That’s what the Nigerian financial sector needs to do starting with the PFAs. Invest in origination. Invest in product innovation. Invest in developers, real estate and infrastructure developers. Invest in new asset classes and financial infrastructure. The sector needs to make say a 5% allocation out of their operating slush funds, and invest that in people and institutions that create and derisk early stage assets. They will lose a lot of that money initially, but they will reap that many fold. If you’re looking for a takeaway from this article, let that be it.

Enelamah the Investment Minister knows about these things. Let’s hope he can find levers to pull, since most of the apparatus of investment is at MoF.