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By Gloria Mamba
Divisional Executive: Investment Banking at the Development Bank of Southern Africa

The opportunity in African infrastructure

African private equity is increasingly a topic of business, politic and investment discussions and rightly so.  Recent historic growth and the woes of the development markets have brought the potential attractiveness of emerging markets and the opportunity in Africa into sharp relief.

While the potential is evident, and key indicators across the range of development, financial and social show positive trends and point the way to further sustained improvement, what is less clear for many potential investors from far afield is where and how to access these markets.

Business leaders tasked with such decisions, seek to inform their thinking about appropriate risk and reward balances with anecdotal data, and it’s at this point that the appeal of Emerging Markets starts to dim.

Despite recent developments in this regard (both the Southern Africa Private Equity and Venture Capital Association and the Emerging Markets Private Equity Association have started tracked performance in a systematic way) An absence of history, research and comparable data in these regions make decisions more qualitative than quantitative, which in some instances, just does not fit the organisation’s decision making framework, notwithstanding the inherent belief that potential higher returns await.

Should these organisations consider not doing business in Africa? Perhaps. But they should also consider differentiating those aspects of the decision which are familiar across regions and time, and with which they are comfortable, with those aspect which are not.

In the world of private equity this typically includes matters such as partners, culture and influence, business plan, currency and exits to name but a few, and in Africa many of these considerations are new and different. How then to play? In Africa, a major opportunity exists in infrastructure related private equity – the need is great and the macroeconomic environment is right to develop the opportunities in toll roads, airports, independent power producers, etc.

Infrastructure plays a critical role in economic development, with important direct and indirect linkages to living standards and economic growth.

Investments in infrastructure result in:

  • A direct contribution to gross domestic product, employment creation, capital utilisation, poverty alleviation and other social impacts;
  • Increased infrastructure delivered sooner than would be the case through public finance procurement; and
  • Increased capacity facilitating increased trade leading to economic growth.

In infrastructure related private equity, many of the decisions associated with making an investment are agnostic in terms of both geography and market.  Wherever you are in the world:

  • Infrastructure assets have returns with low correlation to other investment asset classes.
  • Infrastructure facilitates the delivery of essential services and, as a result, cash flows from infrastructure assets tend to be less susceptible to business and commodity cycle volatilities. 

In addition, the infrastructure offers risk mitigation measures which don’t appear in other areas of private equity.  By way of examples:

  • Private sector infrastructure investing is based upon project financing principles which are well established, and while costs and structuring consideration do continue to adjust to reflect market conditions, the philosophy of identifying and dimensioning discrete risks, and contractually allocating them to the party best able to manage that risk remains unaltered.   It is unlikely that Africa will develop a new versions of project financing, but will rather look at risk differently, so more robust, yes, but new, no.
  • The way risk can be structured out is another constant.  Development Finance Institutions, such as DBSA and the African Development Bank, have long recognised the regional development dividend associated with improved infrastructure.  So too have they recognised that investment in this asset class requires a long period to mature and deliver in financial terms.  Long term commitments are challenging for private sector investors into private equity funds.   Over the past decade, Development Finance Institutions have been active, providing structured risk mitigating and credit enhancing products, which address issues such as political stability, currency liquidity, and counter party credit risk.  These products, which continue to evolve to improve private sector capital flows into the sector, appropriately applied can remove significant risks associated with Africa.  While such products are available to general trade arrangement, the more sophisticated and risk assuming instruments are infrastructure related.

The Global Financial Crisis has delivered a double shot in the arm for investors in infrastructure in Emerging Markets.  Firstly, the conservative nature of the project finance structures employed in Emerging Markets, driven by a higher perception of risk, has resulted in more robustly structured projects able to withstand the effects of the economic slow-down.  So the assets continue to deliver the core services of supporting trade, albeit at a slower rate, and capital structures have stood up to the down side flex.   Secondly, the post GFC relative attractiveness of Emerging Markets, and the associated trade economic and social development boost is resulting in greater demand for improved and new infrastructure in these regions.

Infrastructure investing reflects a unique blend of the old and the new, the application of tried and tested technologies, but in a new and invigorated environment.  In recent years, several investors who had earlier shied away from investing in Africa on the basis of the risks being too uncertain, they should consider Infrastructure as an investment class, and access route into a region of outperformance.

About the Author

GLORIA MAMBAGLORIA MAMBA
Divisional Executive: Investment Banking at the Development Bank of Southern Africa

Ms. Mamba is Divisional Executive: Investment Banking at the Development Bank of Southern Africa (DBSA), with primary responsibility for management of the asset base, balance sheet optimization, strategy formulation, special initiatives and managing relationships with key stakeholders. She previously served as Head: Private Equity with primary responsibility for the Bank’s private equity portfolio -  managing the selection and structuring of new funds as well as relationships with key stakeholders in the private equity and venture capital in the region.

Ms. Mamba holds a BA (cum laude) from Barnard College, Columbia University and a Masters in International Management from Thunderbird, the American Graduate School of International Management.