Fu­sion of cap­i­tal and democ­racy

Pen­sion funds have been slow to in­vest in in­fra­struc­ture and need to come to the party.

Financial Mail - Investors Monthly - - Special Report Infrastructure - Mark van Wyk Van Wyk is head of un­listed in­vest­ments at Mer­gence In­vest­ment Man­agers

An in­ter­est­ing trend is emerg­ing out of the broader theme of how to fi­nance in­fra­struc­ture de­vel­op­ment and con­struc­tion on the African con­ti­nent. It is a move from the sov­er­eign to the lo­cal. The topic was dis­cussed un­der the ban­ner of “the democrati­sa­tion of in­fra­struc­ture cap­i­tal” at a side meet­ing of the re­cent World Eco­nomic Fo­rum Africa (WEF) held in Dur­ban in May.

The meet­ing, at­tended by var­i­ous African and Euro­pean de­vel­op­ment banks and other in­sti­tu­tions, ex­plored ways to speed up and in­crease in­fra­struc­ture spend in or­der to un­lock eco­nomic de­vel­op­ment in Africa, in some cases by “leapfrog­ging” on the back of tech­no­log­i­cal in­no­va­tions brought about by the so-called fourth in­dus­trial rev­o­lu­tion.

A need was iden­ti­fied for earlystage in­vest­ment and de­vel­op­ment fund­ing, such as for fea­si­bil­ity stud­ies and im­pact as­sess­ments, in or­der to get projects from the con­cept stage to bank­a­bil­ity. De­vel­op­ment fi­nanc­ing, with a higher risk pro­file than bank­able projects and a typ­i­cal five-year time span, is the pre­serve of de­vel­op­ment banks, agen­cies and in­ter­gov­ern­men­tal agree­ments.

But once projects are bank­able, in­sti­tu­tional in­vestors and spe­cialised funds are able to fund the con­struc­tion and the op­er­a­tions of the plants. The fo­cus on in­fra­struc­ture de­vel­op­ment is also shift­ing away from na­tional projects to cities, lo­cal mu­nic­i­pal­i­ties and cor­po­rates. This is as a re­sult of rapid ur­ban­i­sa­tion and cities be­ing more ag­ile in project ex­e­cu­tion. In the UK, for ex­am­ple, there are about 25 pri­vate wa­ter com­pa­nies or con­ces­sion­aires that main­tain wa­ter in­fra­struc­ture across the main cities.

This move to the lo­cal level is wel­come. It will by­pass the in­ef­fi­cien­cies of deal­ing at a na­tional level and paves the way for strong in­vest­ment op­por­tu­ni­ties via debt or eq­uity, in­clud­ing public-pri­vate part­ner­ships.

There are in­vestors — and not just banks — that are in­ter­ested in po­ten­tial in­fra­struc­ture de­vel­op­ment fund­ing op­por­tu­ni­ties. Com­pe­ti­tion is heat­ing up and this is a good thing. We are likely to see more so­cial, green and in­fra­struc­ture bonds launched, as well as more list­ings through spe­cial pur­pose ac­qui­si­tion com­pa­nies (Spacs).

Po­ten­tial in­ter­na­tional in­vestors in­clude in­fra­struc­ture and pri­vate eq­uity fund man­agers, many of whom stated at the WEF that they are un­de­terred by SA’s re­cent rat­ing agency down­grades. Bear in mind that while the down­grades are at the sov­er­eign level, this does not nec­es­sar­ily have an im­pact at the project level, where bond yields re­main quite sta­ble.

Do­mes­ti­cally there are in­sti­tu­tional fund man­agers, such as our­selves, whose pen­sion fund clients seek di­ver­si­fi­ca­tion across their port­fo­lios into al­ter­na­tive as­sets such as in­fra­struc­ture, which pro­vide sta­ble longterm cash flows, low cor­re­la­tion to other as­set classes, in­fla­tion pro­tec­tion and gen­er­ally low sen­si­tiv­ity to eco­nomic growth cy­cles.

In­fra­struc­ture op­por­tu­ni­ties are usu­ally long-term in­vest­ments, typ­i­cally span­ning 10 to 20 years. Fur­ther­more, the re­turns are at­trac­tive with me­dian net in­ter­nal rates of re­turn for most un­listed in­fra­struc­ture funds rang­ing from the mid-teens to low 20s. As a re­sult of client in­ter­est and de­mand, Mer­gence has ex­panded its suite of in­fra­struc­ture and de­vel­op­ment funds, which in­cludes a com­pos­ite bond fund, tap­ping into both listed and un­listed in­vest­ments.

Un­like many other African coun­tries, SA has deep debt cap­i­tal mar­kets and we can largely fi­nance our in­fra­struc­ture needs with­out re­ly­ing on de­vel­op­ment fi­nance in­sti­tu­tions. A key change for SA’s pen­sion fund in­dus­try oc­curred in 2011 when reg­u­la­tion 28 of the Pen­sion Funds Act was amended to al­low for an al­lo­ca­tion of up to 15% in “other”, al­ter­na­tive in­vest­ments which in­clude pri­vate eq­uity funds, hedge funds and other de­riv­a­tive or pooled ve­hi­cles.

Take-up has, how­ever, been slow. RisCura in its 2015 “Bright Africa” re­port analy­ses as­set al­lo­ca­tion by pen­sion funds across 10 African mar­kets. SA has the sec­ond-low­est al­lo­ca­tion to “other” as­sets, at 2.3%. This com­pares with a 0.7% al­lo­ca­tion in Botswana, 8.5% in Namibia, 10.9% in Swazi­land and 38% in Zam­bia. The global av­er­age al­lo­ca­tion to this “other” cat­e­gory is es­ti­mated at 24.8%.

Mer­gence sup­ports ef­forts for in­fra­struc­ture to be con­sid­ered as a po­ten­tial sep­a­rate in­vest­ment cat­e­gory in its own right un­der reg­u­la­tion 28. We have been en­cour­aged by some de­vel­op­ments. The As­so­ci­a­tion of Sav­ings & In­vest­ments SA (Asisa) and other in­ter­ested stake­hold­ers are ex­plor­ing means of over­com­ing the chal­lenges that in­vestors face in ac­cess­ing in­vest­ment into in­fra­struc­ture projects. These in­clude av­enues such as list­ing debt in­stru­ments.

Surely pen­sion funds in­vest­ing in in­fra­struc­ture rep­re­sents a good op­por­tu­nity in “democratis­ing” in­fra­struc­ture as­sets? To my mind, pen­sion fund mem­bers should be ques­tion­ing their boards of trustees on whether or not they are in­vested — or con­sid­er­ing in­vest­ing — in in­fra­struc­ture and so help to build the so­cioe­co­nomic en­vi­ron­ment that will af­fect their lives pos­i­tively, now and into re­tire­ment.

Pen­sion fund mem­bers should be ques­tion­ing their boards of trustees on whether or not they are in­vested in in­fra­struc­ture projects

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