Investment opportunities in infrastructure
Traditionally, infrastructure has been f unded by t he public sector. But t he size of t he infrastructure deficit has become far too large for governments alone to finance. Following the 2008/09 global financial crisis, governments have amassed huge debt, making it even more difficult for them to raise the necessary funding to maintain existing infrastructure and build new projects. As a result, the private sector is increasingly finding opportunities to invest in infrastructure programmes.
In South Africa, the department of energy’s Renewable Energy Independent Power Proc ur e ment Prog r a mme (REIPPP) has been a successful example of a large-scale private and public sector procurement programme to develop much-needed infrastructure.
To just keep up with projected global economic growth, about $57tr is needed for infrastructure investments up to 2030, according to a 2013 McKinsey report, Infrastructure productivity: How to save $1 trillion a year. This is 60% more than the $36tr that was spent globally on infrastructure over the past 18 years.
Africa’s infrastructure gap is even wider, according to McKinsey. SA’s relatively immature market has fantastic growth potential, while this is even more relevant in the rest of Africa with its massive infrastructure deficit.
This landscape creates an attractive opportunity for investors wanting to diversify the risk in their portfolios. Fund managers globally are reporting an increase in investor appetite for infrastructure deals, particularly from pension funds, insurance companies and sovereign wealth funds, according to Preqin, a leading source of intelligence on the global infrastructure market.
In terms of infrastructure deal f low, Europe is the most prominent market. According to Preqin’s 2015 Global Infrastructure Report, European assets account for a higher proportion of deals completed per year than any other region. This can be attributed to “the long history of private sector investment in European infrastructure and the largely stable economic, political and regulatory environment in Western Europe, where most European transactions take place”.
Europe’s trend illustrates that transparent, competitive environments overlaid with balanced reg ulator y fr a mework s gi v e investors the confidence to increase their exposure to infrastructure.
Development in Africa has been slow but steady and we expect the continent will start to follow Europe’s lead and echo its success. Once investors start to understand how the private sector can play a role in infrastructure investment, the markets will pick up.
According to Preqin: “The attraction of infrastructure is evident to most institutions. We see the potential for it becoming a significant mainstream asset class for the majority of institutions with a long-term mandate, in the same way as private equity.”
Recognising t he growing role of private sector funding in infrastructure, Stanlib has introduced t wo funds to capitalise on the opportunities. This aligns with Stanlib’s commitment to finding investment opportunities that are part of the solution to Africa’s greatest challenges.
Stanlib’s Infrastructure Private Equity Fund invests in new-build infrastructure projects, the majority of them in SA. Its i nvestments i nclude R813m i n REIPPP wind and solar projects that have a collective nameplate generation capacity of 345MW and are expected to contribute approximately 847 395MWh per year into the national grid for the next 20 years. This is equivalent to powering 192 590 average SA households (using the World Energy Council’s data).
Our Infrastructure Yield Fund focuses on more mature infrastructure assets, investing in post-construction, operational infrastructure projects. Once projects are built and have an operational track record, they have a different risk profile: they have highly predictable revenue profiles and provide a good measure of diversification in a general portfolio.
Infrastructure is ideally suited to investors looking for alternative assets with predictable risk-return profiles. It offers benefits like stable returns with low volatility. Its low correlation to the business cycle adds diversification to an investment portfolio and offers a good inf lation-hedge, as the income streams are usually inflation linked.
We expect that Africa will heed the lessons learnt in markets that have been successful and embrace the participation of the private sector.