The New York Times recently reported eye popping investment returns by US-based university endowments, including 56% by both Duke and MIT and 40% by Yale. A big reason for the gain is investments with private equity funds. Harvard’s private equity investments, worth a third of its US$53 billion portfolio, returned 77 percent in its latest fiscal year. Venture capital funds are also recording huge returns: The University of North Carolina logged a 142 percent return from that portion of its $10 billion endowment.
By contrast, according to the December 2020 Sector Performance Report issued by the Uganda Retirement Benefits Regulatory Authority (URBRA), average returns on investment for the Uganda pension sector during 2020 were just under 12%. Uganda’s National Social Security Fund (NSSF) declared nominal investment returns of 13.82% for the year ended 30 June 2020. Real returns after accounting for inflation were just under 10%. The URBRA report further reported that 88% of pension assets are investment in government securities (76%) and quoted equities (12%). Only 2% of the sector assets are held in unquoted equities.
Why pension funds love government debt
There are very good reasons for the pension funds’ preference for government debt and public equity. The overriding reason is that pension funds are charged with preserving and growing their members’ funds. Therefore, it would be remiss of them to invest in high risk ventures in the pursuit of unguaranteed high returns. Another reason is that government debt markets in east Africa have over provided relatively attractive risk free rates as well as tax planning benefits. The hurdle rate for investment in alternative assets is therefore much higher. Why would a pension fund manager invest in risky private assets when they can earn equivalent risk adjusted returns from government debt?
A significant missed opportunity
However, the current dominance of government securities in pension fund portfolios is a missed opportunity for the pension funds and the Ugandan economy. As demonstrated by the more developed economies of Asia, Europe and America, well managed private equity investments deliver returns well in excess of what is available from traditional debt and equity markets. In addition, private equity investments provide much needed investment diversifications benefits. But the biggest unexplored benefit is the impact on the overall economy.
UK private pension fund NEST recently launched plans to invest £1.5 billion (5% of its assets under management) in private equity. Nest’s Head of Private Markets was quoted as saying that “we want private equity to play an important role in our portfolio, offering strong returns and diversification”. In a letter dated August 2021, UK Prime Minister and Chancellor argued that UK assets are being overlooked by domestic investors, leaving their international counterparts to gather the returns. “Over 80 per cent of UK defined contribution pension funds’ investments are in mostly listed securities, which represent only 20 per cent of the UK’s assets,” they said in the letter. “We want to see UK pension savers benefiting from the fruits of UK ingenuity and enterprise, being given the opportunity to back British success stories, and secure higher returns and better retirements,” the pair wrote. There are rich lessons for Uganda in the stance taken by the UK government in promoting investment of pension assets in alternative assets.
Private equity – a driver of sustainable economic development
In addition to potentially higher than average investment returns, well developed private equity investments deliver several benefits to developing economies such as Uganda. These include:
- More sustainable enterprises by providing appropriate finance and the technical assistance that most businesses crave. Sustainable enterprises create much needed employment, which in turn increases the savings available to pension funds.
- Improved national competitiveness. In addition to appropriate finance, private equity funds bring strategic and operational excellence to their investees, and ultimately improve the odds of enterprise success. This is great for economies such as Uganda that experience several competitiveness challenges.
- Alternative sources of long term return. In the likely event of significant drop in yields on government securities, private equity investments will provide much needed income to the pension sector.
Therefore, it is in long-term interest of the pension sector leaders such as URBRA and NSSF, as well as foresighted pension funds to facilitate the development of the private equity investments in Uganda. One proactive initiative would be for these sector leaders to pronounce themselves on minimum acceptable requirements for investment in private equity. They should then engage with private equity funds active in Uganda to develop and implement these standards.
Achieving the astronomical investment returns reported by US based university endowments may take several years of concerted effort, but it is a worthwhile venture.
Robert Katuntu is a Partner at J. Samuel Richards & Associates, Certified Public Accountants
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