Do you invest in frontier markets?
Investment & Pensions Europe | 03 Jan 2012

Do you invest in frontier markets?
This time for Africa?

Christoph Zimmermann

Torben Möger Pedersen

• Invested assets: DKK116bn (€15.6bn)
• Members: 622,000
• Industry-wide DC scheme
• Companies insured: 22,000
• Date established: early 1990s

We made our first investment in frontier markets, in Sub-Saharan equities, in September 2010. As of today, we have invested DKK150m (€20m) in publicly traded companies in 10 Central African countries and DKK230m in publicly traded companies in South Africa. PensionDanmark has made additional commitments of DKK52m to renewable energy projects in East Africa and a further DKK320m commitment to investments in African farmland.

We have an increasing focus on investments in Africa because it is on track to become one of the next major growth regions of the world. The last decade has seen overall high growth in the region and the IMF expects Sub-Saharan Africa to expand by 5.75% in 2012. As the World Bank put it: ‘Africa could be on the brink of an economic take-off, much like China was 30 years ago and India 20 years ago.’

Our listed equities give us exposure to Kenya, Cote D’Ivoire, Mauritius, Nigeria, Botswana, Senegal, Zambia, Ghana, Malawi, Uganda and Namibia. The farmland investment will focus on agricultural production in Tanzania, Zambia, Malawi, Uganda and Mozambique, while the renewable energy projects will take place in Uganda, Kenya, Tanzania, Mozambique and Zambia.

Our frontier market exposure is primarily undertaken through funds. It is a good way to get started because it can give an investor a broad exposure to the different asset classes. We have been very diligent in choosing the funds we have invested with. As with all other investments, we have also made sure that the size of the investment fits the risk profile.

It is too early to tell whether we will be rewarded with a premium for our frontier market investments. Our overall approach is long-term and therefore the rewards are expected to come only gradually and over time. But we are very confident that they will materialise in an attractive risk-adjusted return on the investments.

We do not yet have the capacity to explore private equity investments in frontier or emerging markets but they will certainly be on our agenda in the coming years. We made some unlisted investments in farmland and in some renewable energy projects in developed markets and so maybe one of the next steps would be to look at private equity funds operating in frontier markets.

PensionDanmark has a large frontier markets investments commitments and the ability to take on the risks associated with such investments.
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Source: IPE