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Power Africa is working on a new initiative that will encourage African and US institutional investors into the energy sector. The initiative will focus on pension and sovereign wealth funds, aiming to channel some of their capital into infrastructure projects, writes Dan Marks

The huge investment required to achieve universal access to electricity in Africa is leading international organisations to turn to those with the biggest pockets: pension funds, sovereign wealth funds and insurance funds. In 2015, African pension funds had more than $300bn worth of assets under management, while African sovereign wealth funds had around $20bn. At the same time the number of sovereign wealth funds on the continent has increased from eight to 17 since 2010. In the United States, pension funds alone manage assets worth tens of trillions of dollars.

A new initiative being developed by the US government’s Power Africa programme and expected to launch this year aims to channel some of this capital into the African power sector. The initiative, which will focus on pension and sovereign wealth funds, is the latest effort to draw institutional investors into infrastructure. Power Africa is working with the African Development Bank (AfDB) and Development Bank of Southern Africa (DBSA) to build on their initiatives.

“The programme will provide detailed technical assistance to pension funds to help them reduce their due diligence costs and identify opportunities, as well as assist with developing skills and capacity to evaluate assets,” Power Africa senior project adviser and US Agency for International Development (USAID) head of financial solutions Vibhuti Jain told African Energy. “We will also work closely with our partners to develop funds and vehicles that take operational assets and aggregate them and potentially securitise and list them to make them investible by African funds.

“We’re looking at targeting two distinct groups of investors. The first is a subset of African institutional investors, primarily African pension funds and potentially some sovereign wealth funds, who haven’t traditionally been investing in alternative assets and have indicated the need for technical assistance and support in evaluating and reviewing project opportunities. The second group is US investors who have expressed an interest in investing in Africa and have indicated through some of USAID’s other initiatives that they would like assistance identifying investment opportunities in Africa and understanding sector risk.”

The two strands are potentially complementary. Jain points out that international investors are often looking for a credible local partner and African pension funds would be an excellent fit. US asset managers bring with them a huge amount of capital and experience of investing in infrastructure around the world, if not in Africa. The combination of hard currency and local currency financing could also reduce the vulnerability of the sector to exchange rate volatility.

Building capacity

USAID has been working with the US National Association of Securities Professionals over a number of years to encourage US institutional investors, through networking and introducing US asset managers to asset owners in Africa. Power Africa aims to build on this work by including African asset managers, who face a different set of challenges in investing in infrastructure.

“Due diligence challenges are amongst the biggest barriers to investing in a new asset class. How do you evaluate a new class of assets? How do you understand actual risk versus perceived risk? How do you go about identifying opportunities?” Jain said. “Another issue facing a number of African pension funds is that they may not have an asset allocation for infrastructure or for alternative assets. Many are investing in mostly fixed income.”

US investors have another set of needs. “In general, the US investors that we’re in touch with have invested in infrastructure elsewhere in the world but have concerns around understanding real risk versus perceived risk in sub-Saharan Africa and understanding the opportunities in this part of the world,” Jain said. “This is a generalisation, but their concerns are often based around understanding how this asset class performs in Africa rather than understanding how to evaluate an infrastructure asset.”

Real versus perceived risk will be a particular focus. According to Moody’s Investors Service, in 2017 only seven out of 257 project finance transactions in Africa defaulted, a rate of 2.7%, compared to a 12.7% default rate in Latin America and 8.3% in Asia. Only transactions in the Middle East had a lower default rate.

Both African and US investors tend to have relatively small teams looking at opportunities. Power Africa sees a continuing role helping to identify opportunities and facilitating business connections, by appointing implementing partners and contractors to provide technical assistance in focus countries.

Facilitating investment

Power Africa is taking a demand-driven approach to selecting assets, but the current view is that operational on-grid plants and indirect investments in funds may be the best place to start. Once a group of investors has been identified, Power Africa will work with them to identify projects falling within their risk criteria. This will help determine, for example, whether off-grid projects are of interest.

As well as looking at which asset categories are most suitable for pension funds, Power Africa is considering how to facilitate investment. “Part of mobilising institutional investment requires creating a supply of investment opportunities that meet the risk criteria of institutional investors,” Jain said. “For example, a pension fund may not have the risk appetite to take direct project exposure and so it may feel more comfortable investing in a fund or bond that provides exposure to a variety of projects. Also, a pension fund may not be able to invest in something that is not listed, so supporting the creation of listed funds is critical.”

Securitisation is another area that Power Africa is exploring. There are several initiatives under way, especially in Nigeria, where InfraCredit has provided cover for two listed corporate bonds for infrastructure companies with Power Africa support in due diligence of corporate assets and plans several more this year. InfraCredit aims to drive investment from Nigerian investors, including pension funds. GreenMax Capital Group is working on a similar scheme for off-grid projects in Nigeria but targeting the US investor market. The AfDB was one of the first investors in the Nigerian Infrastructure Debt Fund (NIDF).

“We want to work with investors to learn what types of investment meet their criteria and then help create those vehicles if there is a dearth of them or if there is a capacity gap among local fund managers or unclear regulations at a local exchange,” Jain said.

Power Africa will look at several possibilities for securitisation. “There are a few different ways you could securitise power assets. You can take the assets of a single company and wrap those with a risk mitigation product and then package them as a bond,” Jain said. “In South Africa, you could take some of the operational assets of the renewable energy independent power producer procurement programme and securitise the cash flows as a yield company. There are many ways of doing it, it really depends on the market you are looking at.

“It could be the case that after we do our research, it turns out we don’t actually need to create green bonds. Maybe we don’t need to over-structure vehicles to drive investment and there is a simpler way of doing things. Power projects in sub-Saharan Africa are often quite structured, so it may be that bonds and securitisations are not necessary,” she added.

Partnerships

Both the AfDB and DBSA have been working on initiatives to promote energy sector access to local capital markets. Alongside its investment in the NIDF, the continent’s first listed infrastructure debt fund, the AfDB has been carrying out capacity building in the sector, while the DBSA has been working with the African Union’s New Partnership for Africa’s Development on an initiative to encourage African pension funds to commit at least 5% of their assets under management to infrastructure.

“We’ve been having a series of conversations with the AfDB and others about the potential of creating more listed infrastructure debt funds in different parts of Africa,” Jain said. “We welcome combining their expertise in structured finance and leadership in Africa with our partnership network and transactional advisory support.”

More broadly, Power Africa hopes to work with development finance institutions (DFIs) to identify assets they may want to refinance or sell down, helping to boost a secondary market. Currently, exit opportunities are limited and a more liquid secondary market would free up capital for developers and investors to re-invest in greenfield projects. This will also allow DFIs to focus on supporting projects through development and construction when uncertainty and risk are highest.