IDEAS fund makes social and environmental impact

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African Infrastructure Investment Managers’ (AIIM) open-ended IDEAS fund continues to take investors on board, targeting South African projects with the potential to deliver strong long-term returns while also creating positive social and environmental impact.

The fund is one of South Africa’s largest domestic infrastructure equity funds and invests in economic infrastructure (roads and railways), social infrastructure (housing and public-private partnerships) and renewable energy infrastructure (solar and wind projects).

It is a pooled portfolio managed by AIIM, one of Africa’s largest and most experienced infrastructure private equity managers and a member of Old Mutual Alternative Investments, and was founded in 1999 with a view to stimulating economic growth through investing in infrastructure.

Investment director Vuyo Ntoi oversees AIIM’s activities within the SADC region, working with a 40-strong pan-African investment team. He joined AIIM in 2003 and has been involved in managing its funds for over a decade and a half.

The rand-denominated IDEAS Fund, which has assets of around R13 billion, is structured as a policy on the Old Mutual balance sheet so that pension funds can receive related tax benefits.

It currently has meaningful equity stakes in around 35 portfolio holdings and has realised investments in a further four projects. More than R6 billion is invested in renewables, an increasingly important sector in meeting the region’s soaring demand for power.

The IDEAS fund spans multiple infrastructure projects including toll roads, specifically the Trans African Concessions, the N3 Toll Concessions and the Bakwena Platinum Corridor Concessionaire; a Department of Trade and Industry office complex; a hydroelectric project; a gas pipeline concession between South Africa and Mozambique; and railway concessions in Zimbabwe and Zambia. There is also a strong focus on renewables, with over US$500 million invested in 14 different solar photovoltaic facilities, nine wind farms and some other projects.

Ntoi notes that the South African environment is slightly different to the pan-African space. “It’s a very competitive environment, and returns are typically in the low to mid teens in rand terms, but we consider them adequate for the level of risk taken,” he says.

“IDEAS is targeted mainly at the institutional pension funds market. They are long-term customers, which matches the fund’s investment horizon." He adds that many of the payments are guaranteed by government, so there is lower volatility than in typical listed and unlisted equities. And because revenues in infrastructure don’t fluctuate significantly, risk is lower: traffic on a toll road is largely the same from one year to the next; a power station produces a certain amount of power and gets paid for such.

Ntoi’s most recent initiatives have spanned both the Pan African and South Africa-focused funds, and include leading the AIIM investment in the Cenpower Independent Power Producer (IPP) in Ghana, and in Umoya Energy, the owner of a 67MW wind farm, located 125km north of Cape Town. Umoya was the first commercial wind farm to supply energy to the Eskom national grid, and it generates about 176 600 MWh of clean renewable energy annually.

“We began to create our own projects when we realised that there was a signifiant development gap”, says Ntoi. “Given the opportunity in the renewables sector, in particular, we established a project development platform. This was before there was an official renewables procurement process in South Africa, and were then chasing commercial offtakes from industry, rather than from Eskom itself. The process caught up with us and provided us with an even greater opportunity set.”

Ntoi says that AIIM has built a name in the industry, so many potential partners approach them. They ensure projects are sustainable from a revenue, cost, debt funding, and a return perspective. “We do thorough due diligence, and ask: are the revenue projections dependable? Is there risk around the revenues? Is there a guarantee? For example, on power plants, we assess the strength of the power purchase agreement. What credit enhancements are behind the counter-party?”

On a toll road, for example, Ntoi says they take volume risk into account, asking whether there are sufficient vehicles travelling the roads, what could affect traffic, and whether people are amenable to paying the toll for the service provided. Furthermore, in some instances, government pays an availability fee for building the road, and they ensure that they have sufficient money to pay that monthly fee.

To understand the sustainability of cash flows, the AIIM team will look at the strength of concession of other contracts. And typically, they get experts to advise them if costs are adequate, from initial capital expenditure in building the infrastructure to the ongoing operations and management. They also do extensive technical and legal due diligence around the capital expenditure and the related risks.

With regards to finance expenditure, their projects are typically project financed. “We structure them so that lenders to the projects only have recourse only to the projects themselves,” says Ntoi. “We structure and review the debt arrangements to ensure they are sustainable and adequate for the project. and following the financing costs, there are also tax considerations. At the bottom of the waterfall are the distributions to asset equity. We look at whether these are adequate for the risk we’re taking in the project we’re investing in.”

AIIM also offers a pan-African strategy, currently investing through African Infrastructure Investment Fund 3 (AIIF3), which recently closed at US$320 million.

The pan-African fund is denominated in dollars, and the bulk of investors are offshore – including development finance institutions and sovereign wealth funds – who are looking for dollar returns.

AIIM’s investments have a strong impact focus, based on the UN Sustainable Development Goals (SDG). “We identify the goals that we can impact, and we monitor and measure to ensure that they are met,” says Ntoi. “For example, our investments create power for households that, in many instances, would not otherwise have had access. We employ people at the power plants or other projects.”

AIIM also ensures that there is buy-in from the community in which projects are located, especially on domestic renewables projects. “We do enterprise and social development, such as early childhood development, in those communities,” he adds. “We aim to be good corporate citizens in the communities where our projects are located.”

Though the returns are adequate for this type of investment, Ntoi says the impact benefit is an additional facet. “We believe that by being impactful in your investments and looking for project sustainability, this de-risks your investment. So, we’re not giving up one for the other – impact and returns go hand in hand.”

“Through funds like ours, South African investors are big stakeholders in local infrastructure. Quite a bit of South African money – and of workers’ money – is involved in these impactful investments.”

FUND FACTS

Fund name: Infrastructural, Developmental and Environmental Assets (IDEAS) managed fund

Inception: 1999

Fund size: R13 billion

Fund close: open-ended

Co-portfolio manager: Vuyo Ntoi