In­vest­ment op­por­tu­ni­ties in in­fra­struc­ture

Finweek English Edition - - FUND FOCUS - BY GIL­LIAN JONES, HEAD OF STAN­LIB THOUGHT LEAD­ER­SHIP AND PER­FOR­MANCE COM­MU­NI­CA­TION, AND GREG BABAYA, HEAD OF IN­FRA­STRUC­TURE FRAN­CHISE AT STAN­LIB

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.

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