THE nondescript building housing the South African Public Investment Corporation (PIC) in a business park in Pretoria gives little indication of its power. Yet from his office inside it, Elias Masilela controls nearly $150bn (R1.6-trillion) that he is increasingly channelling into investments across Africa.
When the Sovereign Wealth Fund Institute, a US-based consultancy, published a list of the world's "most significant and impactful public investor executives" last year, the usual names filled the top rankings. Sandwiched between the heads of sovereign wealth funds from oil-rich Norway and Abu Dhabi were the heads of Chinese and Kuwaiti state-owned funds. But there was one standout: Elias Masilela. The chief executive of the PIC ranked 14 out of 100.
The corporation's ascendancy marked the rapid rise of an entity that for most of its 103-year history was little known outside South Africa. But it has become Africa's largest asset manager and can match the fire-power of the best-known Middle Eastern sovereign wealth funds.
Mr Masilela bristles at the state-owned PIC being lumped into the sovereign wealth funds category, saying that it is a pension fund manager for public employees rather than a classic sovereign vehicle funded by state surpluses. Instead, the South African corporation bears a closer resemblance to the big public pension funds in the US, including the giant California Public Employees' Retirement System.
But, unlike its US peers, which are seen as unambiguously private enterprises managing public pension money, the PIC at times struggles to shed the perception that political considerations as much as financial ones guide its investment decisions. Until recently, there was little interest in the PIC outside South Africa, because it invested all its money locally. But it is now flexing its muscles abroad. The change in focus is being closely watched by other asset managers, bankers and companies.
"They are seeing the sub-Saharan African region as a big target," said Amadou Sy, a fellow at the Brookings Institution, a think-tank in Washington DC. "Africa is suitable for patient money; they have a long-term horizon."
The new strategy is making a powerful impact in the region: its acquisition of a 1.5% stake in Dangote Cement for $289m was the single biggest deal registered on the Nigerian Stock Exchange in 2013.
As the PIC expands its footprint in sub-Saharan Africa, the fund will need to be particularly sensitive to the country's mixed image across the continent, where some South African companies have earned a tag for arrogance. The challenges mean it is taking a gradual approach on its foreign journey, following a 2010 decision to alter its mandate to invest up to 10% of its assets outside South Africa. Half of that $15bn is being spread across global equities and bonds with the help of asset managers such as BlackRock. But it is with the other half that the PIC intends to get its hands dirty.
The size of the investment vehicle, which has nearly doubled over the past five years and in 2013 posted nearly 20% growth, means that any acquisition in Africa is likely to have a ripple effect, as was the case with the stake in Dangote Cement. So far, the push beyond its borders has been modest. Masilela said the fund had invested "about 6.5% to 7%" of its assets offshore — far below the foreign investment levels of other public pension funds and sovereign wealth funds.
But over time the offshore target may grow. "We have a huge appetite for the continent," said Mr Masilela. The PIC is following in sub-Saharan Africa a trail already blazed by South African businesses such as Shoprite, MTN and Standard Bank. South African companies have amassed $18bn in assets in the region with investments in mining, telecommunications, retail and banking.
Two pillars support the push into Africa. First, spreading the risks because the managers are aware that the fund is concentrated at home. Second, benefiting from African peers' strong economic performance during a period some have dubbed "Africa Rising".
But there is another element: the notion that fostering stronger economic growth through investments across the sub-Saharan region ultimately benefits South Africa and its companies. "Our view is that if we invest properly and grow African markets, we will be generating new business for South Africa Inc," said Mr Masilela.
Herein lies one of the vital factors that sets the PIC apart from public pension fund managers in the US and makes it more closely related to state-owned investment vehicles such as sovereign wealth funds: an emphasis on economic development. On one hand it is charged with managing the Government Employees Pension Fund, which accounts for about 90% of its assets. On the other, the PIC has a mandate to contribute to economic development as the South African government seeks to redress the huge economic imbalances created by apartheid.
In fulfilling this latter part of its mandate, the PIC has invested heavily in infrastructure. It is the biggest investor in South Africa's road network and has poured funds into shopping malls, affordable housing, power and health. Mr Masilela promises to pursue a similar strategy as the PIC gradually builds up its exposure north of South Africa's borders with one eye on returns and another on the continents's development.
"For us, going into the rest of the continent is not driven by what your traditional asset manager would be looking for," he said. "We're driven by our ability to help grow African markets."
As their domestic economy stumbles along, hampered by labour issues, policy uncertainty and rising costs, South African companies are leading the charge of foreign groups investing in Africa. Whereas South Africa grew by about 2% in 2013, the continent enjoyed expansion of 5%, according to the IMF, — and the PIC is eager to play an integral part in that development. So far, it has splashed out $250m for a 20% stake in Ecobank, a pan-African group with operations in 34 countries. As well as its investment in Dangote, it paid R2.4bn for a majority stake in Tanga Cement, a Tanzanian company. "We think cement is going to be the next gold in Africa," said Mr Masilela. "You develop airports, you develop pipelines, you develop telecommunications, you develop dams, you develop rail, you develop road. Which of these does not include cement?"
It is a long way from the PIC's humble roots, which it traces back to the 1911 establishment of a "Public Debt Commissioner". Its mandate was to manage trust funds placed in the care of the government. During the decades of apartheid, its role was largely confined to funding government budget deficits by buying sovereign debt.
It first began acquiring equities in the mid-1990s. In 2003, they accounted for 32% of its assets. Last year, the share of equities grew to 45%. By contrast, the proportion of the assets invested in fixed income securities such as government bonds has dropped from 51% in 2003 to 35% last year.
Its shift towards equities has given the PIC a more powerful voice in South African corporate circles. It is difficult for investors to avoid the PIC's presence because the fund manager is a top shareholder in virtually every listed South African company. The PIC has raised eyebrows at home: its activist stance has sparked controversy and, in some instances, its decision-making and motives have been questioned. "They hold themselves out to be independent, but there is scepticism as to whether they are truly independent of government," said a senior South African executive. "I don't think they are a completely neutral, commercially objective institutional fund manager that acts completely independently of policy trends in the country."
Brian Molefe, Mr Masilela's predecessor, won a reputation for using the PIC as a platform to chastise South African companies for the slow pace of racial transformation. Investors can be sure that the PIC will not be afraid to stand up for what it deems is in the best interests of the country.
It is a view with which former Anglo American head Cynthia Carroll would probably concur. Few have felt the PIC's wrath so publicly. When she announced her resignation under investor pressure in 2012, the PIC, the mining company's largest single shareholder, took the opportunity to deliver a public and withering critique of Ms Carroll's performance.
More recently, it courted controversy with opposition to an attempt by CFR Pharmaceuticals, a Chilean group, to buy Adcock Ingram, a struggling South African firm, for R12.8bn — helping to scupper the deal.
In the middle of a bitter battle, CFR placed an advert in the local press in which Alejandro Weinstein, its chief executive, complained that the "criticisms levelled at our offer by the PIC have little to do with the commercial merits and are instead intended to allow a local buyer to succeed over a foreign buyer".
Proponents of the acquisition said the PIC's resistance sent out a dangerous message to other potential foreign investors. The PIC countered that it supported foreign investment as long as it has "predictable long-term benefits for the South African economy", citing as examples Barclays's acquisition of Absa and Walmart's deal to buy a majority stake in Massmart, a South African retailer.
CFR dropped its bid this month after a local rival, Bidvest — in which the PIC has a large holding — secured more than a third of Adcock's shares.
The controversy was not the first time the fund's actions have come under scrutiny. A decade ago, the PIC was forced to defend its role in the acquisition of a stake in Telkom in a deal that benefited Elephant Consortium, a group that included politically connected people. "Their decision-making is not always transparent and it's not obvious," another executive said.
What is clear is that any foreign firm looking to do business in the South African corporate sector — and increasingly in the rest of Africa — would ignore the PIC at its peril.
The PIC may be the largest state-owned investment vehicle on the continent, but it is not alone. More and more African countries are creating their own public pension fund schemes and setting up new sovereign wealth funds.
"This is a huge development of the [African] economy," said Diana Layfield, chief executive for Africa at Standard Chartered.
The biggest trend in Africa remains the launch of new sovereign wealth funds, including vehicles in Nigeria, Ghana and Angola. The largest funds are in North Africa. The Revenue Regulation Fund of Algeria has $77bn in assets and the Libyan Investment Authority has $65bn under management. In sub-Saharan Africa, the largest is the Pula Fund of Botswana with almost $7bn in assets, which the country's central bank handles with the help of eight external managers.
Over the past three years, oil producers Angola, Nigeria and Ghana have established sovereign wealth funds, managing $5bn, $1bn and $100m respectively. Others are likely to follow suit, according to Mthuli Ncube, chief economist at the African Development Bank.
"Recent big oil and gas discoveries in East and West Africa are likely to give new opportunities for more African sovereign wealth funds in the mid term," he said in a recent report.
© The Financial Times
• This article was first published in Sunday Times: Business Times