African sovereign wealth funds (SWFs) can be put to far greater use as drivers of economic growth in their own economies. The first edition of the African Sovereign Funds Index, developed by strategy consulting firm Konfidants in partnership with the AfroChampions Initiative and PG and Partners, looks at how they can be put to this use. Read this interview with Michael Kottoh, managing partner of Konfidants as he speaks about the objectives of the Index.
What is the main objective of the African Sovereign Funds Index?
The main purpose is to focus attention on how African SWFs contribute to their continent’s development. Many of these funds invest on international markets and not locally in Africa in national projects. But these funds could be used to invest in African economies, which are perennially in need of financing.
Could you tell us more on the methodology you used for the Index?
Envisaged as a multi-year project, the Index has seven main indicators: Governance and Disclosure; Domestic Investment Mandate; Size of Fund; Diversity of Sources of Funding; Financial Performance; Economic Impact; and Sustainability. This year, the main topic of the report is “relevance”, examining how relevant these funds are to the development of African countries.
How did you weigh these criteria?
The indicators for this year’s Index were weighted as follows: Governance and Disclosure (35%); Domestic Investment Mandate (25%); Size of Fund (30%); Diversity of Sources of Funding (10%). We put a particular emphasis on the governance issue because the more the fund is transparent in its use of money and investment, the more it will be able to invest efficiently and the bigger its impact. The second criterion is the existence of a domestic mandate for the fund. Its statutes must require the fund to finance and develop projects in the country.
The third criterion is the nominal size of the assets under management relative to the size of the national economy. The last criterion is the type and diversity of funding sources. Eight of the 20 funds studied have only one source of funding – mainly oil revenues. But it is always better to have more than a single source of funding in order to reduce the fund’s vulnerability to international commodity price shocks.
The three criteria that were left out are hard to assess because a lot of the information isn’t publicly accessible. We hope we can engage more closely with the funds on these issues in the future.
Are the funds’ management teams responsive to this type of in-depth investigation?
Many of them are actually very responsive. Under the aegis of the AfroChampions Initiative, we have been been able to launch the African Sovereign Wealth Funds Alliance, and many of the funds are members.
When investing in their economies, should the SWFs partner with other financial institutions or should they invest in their own projects?
We think we need a combination of both approaches. The best way is to partner with other players in order to share the risks but also to leverage new opportunities.
Most of the African SWFs we studied have great potential. But to make the impact expected of them, they need to have more innovative approaches to investment partnerships with the private sector and other sovereign funds. They should be more transparent and accountable
Read full interview here