The emerging market spells a quantum leap in investment risk for most pension funds which now view them as an essential alpha generator as traditional asset classes have become both more unpredictable and disappointing in terms of their returns. But what of the newly coined ‘emerging emerging market?’ A class of asset that includes countries such as Tanzania, Ghana, Kenya and Vietnam would be too unknown and too risky for most pension funds to contemplate. Unless, that is, the pension fund is very big and has the support of a significant partner. A government, for example.
The ‘emerging emerging market’ is a term coined by Peter Damgaard Jensen, CEO of Danish fund PKA, whose eight pension funds, along with PBU, will invest €63m in the Private Equity Developing Countries fund, which includes, so far, Tanzania and Vietnam, in a 10-year programme sponsored by the Danish foreign ministry. “Following a change of policy the government has started considering how Denmark could invest in developing markets,” he explains. Ghana and Kenya are also under consideration.
Naturally these markets bring with them bigger risks but it is the additional returns that are of interest. “It is important to emphasise that the primary aim of PKA is to generate return for the fund and to attain greater diversification,” says Damgaard Jensen.
He believes that if the investments are handled professionally they should be good for five to 10 years. “There may be some problems for a year or two but over the course of the programme I expect the return to be positive – around 2% more than our other private equity funds,” he continues. “One or two countries might not perform well but this will be offset by the other five or six in the group which will perform.”
He is also keen to stress that whatever the outcome PKA’s exposure is tiny, with just 0.3% of assets under management planned for this new asset class.
“An investment of say, 2-3% would be far too much,” says Damgaard Jensen.
So what are the principal risks? An obvious concern is political risk, including the possibility of corruption. Damgaard Jensen aims to reassure: “We already have experience in these matters as we investigate the more mainstream emerging markets,” he says.
He adds: “Over the last 10 years Tanzania has been pursuing more favourable policies for investors and with more stability than in the 1970s and 1980s. It changed direction in 1995 and has been gradually pursuing a liberalisation of the economic system. So there are more opportunities for foreign investors. Now it is important that it stays like that.”
But concerns persist. “Tanzania has no track record because the first investments were only made a couple of years ago,” Damgaard Jensen concedes. “But other markets like Vietnam have a longer track record.”
There are further human rights concerns in Tanzania, Kenya and in Vietnam. Damgaard Jensen points out that the governments concerned know that if they want to attract
foreign investors they have to provide some stability. “Nonetheless we will need to pay very close attention to what is going on in these countries,” he continues. “A major point here is that every single company that we invest in will be scrutinised in accordance with the UN Global Compact on human rights, labour market conventions, environmental issues and corruption. These principles are aimed at the companies, not at the region or at the country. And we invest in companies – not in countries or governments.”
He adds: “We have also established screening procedures via the Ethical Investment Research Service that will give us the opportunity to look more closely into what happens and maybe start a dialogue with a company that may have ended up on the wrong path.
“Having said that I also admit that operating in developing countries means a risk regarding political stability. However, the fact that we have established a partnership with our foreign ministry should help us quite a lot. And so far we have only considered investing in the foreign ministry’s programme countries.”
Clearly companies in these countries do not have the same traditions in accountancy and governance. “The quality of transparency could be a problem,” says Damgaard Jensen. “Therefore it is important that all accounting and governance issues are solved. There will be tight monitoring of performance especially for the first few years.”
The extent of the foreign ministry’s financial involvement is around €7m which will be used to cover extra costs related to investing in developing countries, identifying qualified companies, pilot studies, education and training.
“The main goal of the foreign ministry is development,” says Damgaard Jensen. “That is why they are prepared to cover the additional costs. If they were not paying this amount we would not invest.”

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