Africa: continent of opportunity for real assets?
In 2021, Africa accounted for 5.2% of global foreign direct investment (FDI) flows, rising to US$83bn (€80bn) during the period from $39bn the year before.
Most African nations are experiencing FDI gains following the slump caused by the coronavirus pandemic in 2020, according to figures from the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2022 report. Egypt saw greenfield projects more than triple with the help of an announced real estate project by Reportage Properties. Morocco signed a deal with UK energy start-up Xlinks to build a 3,800km transmission line to the UK. Nigeria, the most populous country on the continent, saw its flows double to $4.8bn, mainly because of the resurgence in oil investment and expansion in gas, according to UNCTAD’s report. Investors from the UK, France and the Netherlands held the top three positions as foreign assets owners (by the number of assets) in Africa, followed by the US and China in the fourth and fifth positions respectively, the UNCTAD report reveals.
Despite being the world’s second largest and second most populous continent, Africa is often sidestepped by most global investors and managers when it comes to real assets due, in part, to the lack of availability of sizeable transactions. In the past five years, for instance, investment managers like Blackstone and KKR have cut back. Blackstone Energy Partners have no current investment activities in Africa, a spokesperson confirms, but says “our business is global, so it is possible we may invest in the future, as we have in the past”. For those invested on the continent, the abundance of available land and increasing population are a few of the benefits that present great real assets and impact investment opportunities for institutional investors.
Africa is experiencing an “urbanisation mega theme” spurred on by a population that is increasing in terms of GDP per capita, says Geoffrey Seeto, managing director at New Forests. “And as those people move into a higher income bracket or into the middle class, they will start consuming more timber products.” Seeto, who oversees New Forests’ forestry investment programme in Southeast Asia and Africa, says the firm is seeing an opportunity not only to expand the forestry sector by planting new trees in Africa but also a market for timber in the local markets. “Africa has growing economies, rising timber demand and is home to around 15% of the world’s forests,” he says. “These vital ecosystems are under pressure from biodiversity loss and deforestation, as the continent faces a growing wood products shortage as economies and populations grow. Investing in and expanding the plantation forest sector in a sustainable manner and improving forestry and landscape management practices is critical to conserving intact natural forests, combatting climate change and creating naturepositive outcomes in the region.”
Seeto believes that Africa has significant potential for forestry and wood-processing investment due to the competitive growing and processing costs, strong potential growth rates, large areas of land zoned for forestry, large growing domestic markets and good access to Europe and Asia. “The target [internal rate of return] is in the low teens, which institutional investors may find appealing,” he says. Funke Okubadejo, real estate director at Actis, says: “Africa remains an attractive investment destination amid rising global uncertainties given its strong growth drivers – untapped demographic potential with a youthful population and rising urbanisation with over 15 megacities.”
She says these factors drive demand for real assets in the form of critical infrastructure (power, data centres) and real estate to support commercial (logistics, office, retail) and social (housing, schools) sectors.
Actis recently closed its Nigeria Real Estate Income Fund. “Opportunities to close the growing supply gap of real assets that intrinsically offer inflation protection, particularly in economies that are less vulnerable to external shocks, are attractive and meet the growing demand for yield by institutional investors,” Okubadejo says. “At Actis, sustainability is at the core of our investing and we focus on building sustainability leaders with a focus on alignment with [United Nations’ Sustainable Development Goals], governance, social and environmental impact. For instance, we pioneered green buildings in our markets and are already well positioned for the broader initiative for the transition to net zero.” A previous Actis infrastructure fund, which targets low-carbon energy infrastructure assets in Africa, Asia and Latin America, counts the Teacher Retirement System of Texas, the Florida State Board of Administration (SBA) and Denmark’s Industriens Pension among its investors. “Our investment in Actis is part of the long-term build-out of our portfolio,” says Florida SBA. “We continue to look for opportunities that fit our plan.” Ashwin West, head of sustainable infrastructure investments at Schroders-owned BlueOrchard, says there is a significant demand for infrastructure investment in Africa to close the gap between supply and demand of basic services.
Late last year, the BlueOrchard Sustainable Assets Fund and OP Finnfund Global Impact Fund I provided debt to help Africa Mobile Networks expand its network in rural Sub-Saharan Africa. Markus Pietikäinen, CIO of Finnfund, says the impact investor has a “mandate to achieve positive impact in frontier and emerging markets” alongside a positive financial return. “According to our strategy, we seek to double the total impact of our investments from 2020 to 2025. More than 50% of our investments are made on the African continent. There is a lot of potential for both impact and financial returns when investing in Africa,” he says. “Infrastructure is the backbone for development and hence our interest for investing in real assets in Africa.”
West believes a private-credit infrastructure strategy can provide investors with a “smoothed cash yield”, which can be used to match their longer-dated liability profiles, and which is not reliant on an exit event to generate the return, as with private equity. “Private loans can be structured with amortisations, and can be secured, providing a good risk-adjusted return,” West says.
According to the EY Africa Attractiveness Report 2021, between 2016 and 2020, the US led in the number of FDI projects in Africa, followed by France, China, the UK and Germany in that order. In terms of capital invested during the period, China was by far the largest investor during the same period. The report also points out that cross-border investments in Africa have gained traction since 2016, with South Africa as the largest investor into the rest of the continent. The trend is highlighted in recent joint research by the African Development Bank, the International Finance Corporation and Making Finance Work for Africa, which finds that local institutional investors have a role to play to help plug an estimated infrastructure finance gap of US$130-170bn a year. According to the research, local pension funds, insurers and other institutional investors are vital to making local capital available for investments. “When these investors diversify their portfolios into vehicles that channel capital toward longer-term uses, such as building and maintaining vital infrastructure, mitigating climate change, and providing more affordable housing, these financial institutions gain an enhanced means of managing risk, including during economic downturns,” the report says.
African Infrastructure Investment Managers (AIIM), owned by the African financial services group Old Mutual, has been an active investor in the continent for over two decades and currently manages investments with operations spanning 19 countries across East, West and Southern Africa. Last year, AIIM’s IDEAS Managed Fund, the manager’s flagship open-ended Southern African Development Community (SADC) infrastructure fund, received new commitments from 19 South African institutional investors. IDEAS has built up a portfolio of more than 40 assets since its inception in 1999. Paul Frankish, an investment director at AIIM, says institutional investors, both local and foreign, are facing an environment of lower medium-term growth. “This is characterised by increasingly challenging conditions in some of their more traditional investment markets, and they are therefore looking to new markets to provide long-term growth in their portfolios,” he says. Africa is certainly not immune to these macroeconomic challenges, but the long-term growth drivers for Africa remain robust – particularly when considered for specific sectors and regions which are being supported by long-term structural trends, rather than cyclical trends, Frankish says. “Africa remains the world’s most underserved region from an infrastructure investment perspective, and this means that there are significant opportunities to deliver strong returns in sectors and regions with the biggest demand-supply gaps. But there is also an opportunity to make a material impact through the investments we deliver.
On the role that real assets and impact investments in Africa should play in institutional portfolios, Frankish says all investments in institutional portfolios need to provide appropriate commercial returns – and looking at the African benchmarks that has been challenging historically. But Africa is a huge continent of 1.4bn people and around $3trn in GDP across 54 countries with vastly different economic and investment prospects.
Many African countries are not at the scale or level of economic development to provide appropriate investment opportunities for institutional investors, and there are several multi-lateral programmes focused on these, he says. “There are, however, also a number of countries which have the necessary economic and investment maturity and importantly have sectors with strong growth opportunities to provide compelling investment opportunities for institutional investors. We believe that within these specific countries, our focus sectors across digital infrastructure, energy transition and mobility and logistics provide these opportunities for investors. “We are seeing strong interest globally from investors who see Africa as a key market for long-term growth, with a level of un-correlated returns from the rest of their portfolio and with the ability to make a measurable impact through their investments.”