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“We know there is appetite for African infrastructure as an asset class from institutional investors – our partnership with [German financial services company] Allianz back in 2018 and its investment in our fund was testament to this,” says Martijn Proos, director at Ninety One, the global asset manager that manages the fund. The EAIF is a Private Infrastructure Development Group (PIDG) company.
“But to expand our investor base, we need to make investing in the fund […] easier. A rating from an external agency helps us to achieve that,” he says. “And since the rating was announced, the interest has been phenomenal.”
Even though credit ratings from external agencies are not a necessary requirement for all investors, they do convey the risk associated with investing in a specific company or fund. As such, many investors are mandated to allocate to ‘credit worthy’ or ‘investment grade’ assets only.
As such, the international rating opens the door to new investors, previously blocked from exploring African infrastructure via the EAIF, to explore their options through the vehicle. As per Moody’s categorisation, A2 means that the fund is investment grade, subject to low credit risk with a strong ability to repay short-term debt obligations. The EAIF is now looking to raise capital for its next fund, which it aims to close by Q1 2023.
“The fund raised $385m in 2018, which we are still benefiting from today, but moving forward we may look at raising smaller amounts – between $100m to $250m – perhaps more frequently, given the heightened interest we are seeing from investors,” says Proos.
The role of coal
This increased investor interest comes at an important juncture in Africa’s economic and industrial development. Not only is the infrastructure investment gap huge – lacking by around $100m each year, according to the African Development Bank (AfDB) – but the drive towards more sustainable and ‘greener’ investments to mitigate against the impact of climate change may stymie Africa’s current path towards development moving forward.
Investors that do buy in to the African story are always surprised by the low-default rates.
Meanwhile, the Russia-Ukraine war has spurred a drive from some of the more developed economies to re-evaluate their use of fossil fuels as energy prices soar globally and the cost of living crisis worsens.
In response, Gwede Mantashe, South Africa’s mineral resources and energy minister, argued – in a recent interview with Bloomberg – that renewable electricity would not be enough to bring an end to the country’s rolling blackouts, and that the “co-existence” of technologies will be required to supply the country’s electrification needs.
It is a sentiment that is gaining traction among some African leaders in the run-up to COP27. However, funds, such as EAIF, are taking a more measured approach to how they will tackle the transition. In 2020, the EAIF announced that it would no longer invest in any oil-related projects. Gas projects, however – often considered an important steppingstone in the transition towards renewable energy – are still very much on the table.
“Our portfolio is now made up of 60% renewable infrastructure projects and as a fund, we are increasingly focussed on renewable energy projects – especially as the pricing is becoming a lot more competitive,” says Proos, “and where we do continue to invest in gas projects, it is after a lot of cost-benefit analysis, which evaluates the impact of the project at all levels.”
This approach was taken most recently in Mozambique, with the $652.3m gas-fired power plant in Temane. The IFC, the Dutch bank FMO and the EAIF provided a combined $253.5m of funding to the project.
“We looked at income per capita, affordability, whether it will be in line with the Nationally Determined Contribution [NDCs] and policies of a specific country and much more,” says Proos. “It is a very strict set of criteria that takes into account the local and regional context.”
However, Proos and the EAIF are very much about pushing new technologies and renewable energy projects, “and where it’s not deemed economically or financially viable, we try to make it work,” says Proos.
For the EAIF, this means the use of viability gap funding – where government support is leveraged to get economically justified projects off the ground, such as with public-private partnerships – and blended finance – which combines official development assistance with private and public funds to create returns on investment – to get projects off the ground.
The latter approach is gaining momentum in Africa as a tool to close the infrastructure gap and work toward UN Sustainable Development Goals – while attracting new investment into Africa.
“De-risking the project brings new investors in,” says Proos. This is because development institutions, dedicated to creating impact, will accept greater risk and/or lower returns so that first-time financial investors can achieve solid commercial benefits. An appealing prospect for investors, who may be less inclined to take on African risk in the current high-yield environment.
“Investors that do buy into the African story are always surprised by the low-default rates,” says Proos. Indeed, according to research from Moody’s Analytics, the Middle East and Africa have the lowest default rates in global infrastructure debt with 0.3% and 1.9% default rates respectively.
We have gone through a number of crises during the lifetime of this fund and still we have seen that African infrastructure is an asset class that delivers stable and recurring cash flows.
Still, given risk perception remains high when it comes to investing in African infrastructure, blended finance and investment grade ratings for Africa-focused funds may still be required to get first-time investors through the door.
“We have gone through a number of crises during the lifetime of this fund and still we have seen that African infrastructure is an asset class that delivers stable and recurring cash flows,” says Proos. “and that’s the story we must continue to tell”.
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