Since its establishment nearly 20 years ago, the Africa Finance Corporation has focused on improving infrastructure to foster the economic growth and industrial development of African countries while also delivering a competitive return on investment to their shareholders and investment grade bonds for fixed income investors.
The AFC has largely delivered on its potential, reporting a $50 billion impact on the gross domestic product of African countries while creating more than 7 million jobs across 36 countries. The AFC has become a destination for an array of global investors with one notable exception — U.S. pension funds.
Daniel Preston, a clinical professor at the Paul H. O’Neill School of Public and Environmental Affairs, recently published the working paper, “Obstacles to U.S. Pension Fund Investment in Africa,” seeking to identify the reasons behind the lack of investment in the AFC and the African continent more broadly.
“In 2019-20, I built a strong relationship with the AFC due to their contributions to a consulting engagement, and I became curious about their efforts to raise capital from U.S. investors,” Preston said. “My interest was centered on U.S. pension funds, since the AFC had been unable to attract their investment despite directly engaging with them and presenting an attractive investment opportunity.”
The research suggests inadequate returns, elevated risks, unsuitable investment characteristics, limited investment opportunities, higher costs, and poor liquidity are impeding investment in Africa. Institutional obstacles in the U.S. pension fund ecosystem are mostly responsible for funds forgoing investment in the AFC.
“The reasons provided by U.S. pension funds to the AFC had little to do with the investment characteristics of the AFC and more to do with their investment policies or geographic preferences,” Preston said.
The study also suggests that U.S. pension funds could benefit from reevaluating their investment policies, considering a larger allocation to fixed income investments abroad, and incentivizing investment consulting firms to build their capacity to provide investment advice for African markets.
“My next goal is to focus on developing concrete solutions to mobilize private finance at the scale necessary to improve human development in low-income countries,” Preston said.