Policymakers in Africa are seeking to improve social stability and create jobs through the use of regulation to increase the country’s exposure to the real economy, according to Gerald Gondo, Business Development Executive at RisCura.

Policymakers in Africa are turning to increased exposure to the real economy as a means of improving social stability and creating jobs, according to the RisCura Bright Africa research. Gerald Gondo, Business Development Executive at RisCura, notes that this trend is likely to continue for the next decade as policymakers use regulation to increase their country’s exposure to the real economy while addressing the low adoption rate of formal pension funds by informal workers, which can pose a risk to social stability.

Gondo points out that African pension funds are heavily invested in traditional listed assets (public equity and local currency sovereign bonds), which do not necessarily directly connect pension capital to investment opportunities in the real economy.

The limited number of listed stock exchanges in Africa also leads to higher concentration risk and lower liquidity on these exchanges. African stock exchanges are not the immediate exit venue for most private equity funds that are investing on the continent; instead, the most frequent exit partners are trade buyers, other private buyers (family offices) and larger private equity firms.

“Policymakers in Africa are turning to increased exposure to the real economy as a means of improving social stability and creating jobs.”

Private equity funds provide growth capital to African entrepreneurs. African institutional investors can participate in this growth by allocating capital to alternative assets, such as private equity and infrastructure. Generally, alternative investments are uncorrelated to listed markets and offer opportunities for diversification.

Further, for those institutional investors with the increasing intention to ensure their investment footprint also achieves impact, private equity offers significant and tangible outcomes. These investments in the real economy directly contribute to areas such as job creation, education, healthcare and energy, all crucial building blocks for Africa’s development.

“Smart, strategic investing by Africa’s pension funds in alternative investments will prove catalytic to Africa’s economies and ensure wealth creation for pension fund beneficiaries.”

Gondo warns that the current low adoption rate of formal pension funds by informal workers is a long-term systemic risk facing the continent. “The low savings rate in many African countries needs urgent and innovative solutions to mitigate against widening inequality. Finding ways to channel informal savings into the broader economy and capital markets is critical and assures more significant domestic capital funding and enables Africa’s 2063 growth agenda. Smart, strategic investing by Africa’s pension funds in alternative investments will prove catalytic to Africa’s economies and ensure wealth creation for pension fund beneficiaries.

In conclusion, policymakers in Africa can use pension and investment regulation to increase domestic savings, meaningfully invested in alternative investments, which can directly improve social stability and create jobs.

Alternative assets, such as private equity and infrastructure, are a potential solution for the continent’s performance towards achieving its sustainable development goals while offering opportunities for diversification and a significant positive impact. Regulatory reform can deliver on the dual objectives of attracting the substantial wealth that resides in the informal economy in Africa and channeling these savings to support the growth of the real economy.

Sign up for our Education Series for Institutional Investors newsletter to stay updated on the latest news and trends in the investment world.