It’s a well-known fact that infrastructure investment is urgently needed across Africa, including in South Africa. The African Development Bank estimates that the continent’s infrastructure financing needs will be as much as $170-billion a year by 2025, with an estimated gap of around $100-billion a year.
And in the private equity (PE) environment, it’s a popular sector for investments. According to the 2021 Southern African Venture Capital and Private Equity Association’s (SAVCA) Private Equity Industry Survey, infrastructure investments accounted for 22,8% of the total cost of investments for the 2020 period.
In addition, infrastructure-focused private equity funds have been attracting an increased share of the pie over the last three years. In 2018, 14,7% of total private equity funds under management was invested in infrastructure-focused PE funds. In 2020, this figure increased to 33,4%.
But where should South African (SA) investors be looking to deploy capital – on domestic shores or on the rest of the continent?
A panel of experts debated this at the recent SAVCA Private Equity conference.
Speaking for the South Africa team, Kasief Isaacs, senior investment principal (private markets at: Mergence Investment Managers highlighted South Africa’s well-established regulatory environment as in important factor.
He said: “One of the biggest drivers behind our deployment of capital into South African infrastructure is the predictability and certainty associated with our regulatory framework.”
Makole Mupita, co-founder of Mahlako Financial Services and fund principal of Mahlako Energy Fund agreed, pointing to the willingness of the regulator and policy makers who engage with the industry as an indication of the favourable regulatory environment.
Bame Pule, founder and CEO of Africa Lighthouse Capital who argued for the rest of the continent, suggested that it’s not impossible to get to grips with the regulatory environment in other countries.
“It’s good that we invest in South Africa because we understand how things work here. However, we can develop such an understanding of other African markets, we just need to take the time to undertake market research and work with local investors.”
He also highlighted that many of the infrastructure investors in Africa are international, which should give South African investors a degree of comfort that any disputes will be settled in jurisdictions that are well known and transparent. This also provides a hard currency underpin that isn’t necessarily available in South Africa.
The panel in support of investment into the rest of Africa dispelled the notion that the rest of the continent is a wild frontier that no one has ventured to before and pointed to a long history of public-private partnerships.
While there can be no doubt that energy infrastructure is urgently needed in South Africa in particular, the panelists agreed that there are other types of infrastructure that are desperately required to boost economic growth across the continent.
Isaacs mentioned affordable housing and water as attractive areas in need of investment, not least because he quoted that 6-million South Africans are expected to move to cities over the next 10 years. According to Isaacs, there are plenty of opportunities here in South Africa and these are not confined to energy.
He said: “Even beyond energy, the opportunities in South Africa are vast and readily accessible.”
Pule was similarly optimistic about opportunities outside of the energy sector across the rest of the continent: “We’re expecting to see much more non-energy investment, especially in the transport sector,” he said.
Transport was also an area identified by Vuyo Ntoi, co-MD of African Infrastructure Investment Managers, who pointed to new toll roads being built. He put forward that the urbanisation rate in the rest of Africa is expected to be greater than that of India and China combined. He said that this means there are opportunities for investments in port logistics and the cold storage chain.
However, perhaps it’s not about choosing one over the other in terms of South Africa versus the rest of the continent – maybe there shouldn’t be a wrestling match for funds. After all, South Africa is in Africa and it can’t be denied that infrastructure needs are common to all African countries, even if priorities are different.
Lizeka Matshekga, head of implementation at Harith General Partners said: “I don’t see the split [between SA and the rest of Africa]…I see us working together and complementing each other. It’s more about the partnership.”
Ntoi echoed the sentiment towards collaboration. “To some extent, the debate is moot because we should all be encouraging investment into infrastructure, period. And making it easier for trustees to understand how infrastructure investment in both South Africa and the rest of the continent can be additive to a portfolio,” he said.
With the amendments to Regulation 28, which enable pension funds to allocate up to 45% to infrastructure, there is hope that the asset class will see more inflows going forward.
For Fulu Makwetla, MD of Third Way Investment Partners, this seems likely. “The lack of returns available from other asset classes combined with the increase in allocation means pension funds can’t ignore allocating to infrastructure,” she said.
Making the case for domestic infrastructure investment and how it stands to directly benefit society and the economy, she said: “As a member of a pension fund with liabilities in South Africa, I would like to retire in an SA that is sustainable – where there are hospitals and shops near where I live, tarred roads and education facilities for my children and grandchildren.”
Tanya van Lill, SAVCA CEO, concluded: “It’s clear, whether deploying capital in SA or further afield on the rest of the continent, there are growth opportunities to be found in infrastructure investing. It is one of the most effective assets with which to diversify a portfolio and contribute to the growth of an economy.”