Asset owners are starting to venture to Africa to make infrastructure and private equity investments.
These investors are betting that a combination of population growth, massive need and building global support, including World Bank guarantees, will lead to attractive risk-adjusted returns.
Some recent developments include:
- The $9.8 billion Chicago Public School Teachers' Pension & Retirement Fund is in the midst of a search for a private equity manager to run a $20 million to $25 million commitment, possibly in a separately managed account, with a geographic focus on Africa.
- The $25.1 billion San Francisco City & County Employees' Retirement System in January revealed it committed up to $100 million to Denham Capital Management LP's International Power SCSp fund, which invests in power projects in Africa and other emerging markets.
- Three Danish pension funds seeded A.P. Moller Capital's first fund, which plans to invest in African infrastructure, with a combined $550 million commitment. Investors in Africa Infrastructure 1 are the 250 billion Danish kroner ($39.6 billion) PKA, Hellerup; 239.7 billion kroner PensionDanmark, Copenhagen; and $20.9 billion Laegernes Pension & Bank, Fredriksberg.
A $3.3 trillion aggregate gap in infrastructure funding exists when the worldwide United Nations' sustainable development goals are included, according to a soon-to-be released report on infrastructure investment in Africa by Mercer Investment Consulting LLC and Mobilizing Institutional Investors to Develop Africa's Infrastructure.
MiDA is a partnership made up of the National Association of Securities Professionals; the United States Agency for International Development's Office of Private Capital and Microenterprise; and the Africa Private Capital Group of the Southern Africa Mission.
"There is interest, and I would say it is growing," said Alex Bernhardt, Seattle-based principal, U.S. head of responsible investment, at Mercer Investment Consulting. Mr. Bernhardt co-authored the Africa investment report.
In 2017, MiDA members closed on roughly $500 million in infrastructure transactions in sub-Saharan Africa, MiDA reports.
"The development finance community is interested in Africa writ large," Mr. Bernhardt said. "Infrastructure is needed and there is an opportunity to make development environmentally sustainable."
In Africa, there is more need for greenfield infrastructure construction rather than investment in brownfield, or existing, projects, he said. That can be a challenge for investors who look to infrastructure to provide income rather than a return boost for their portfolios, Mr. Bernhardt said. Greenfield infrastructure in Africa might not fit into their asset allocations.
Another stumbling block is the longer amount of time it takes to realize returns because it can take years to finalize a transaction due to bottlenecks in the approval process. Also, the "higher perceived barriers to entry outweigh the benefits," he said.
"There are biases that people exhibit, which is understandable ... due to the way Africa is portrayed in the news," Mr. Bernhardt said. "What is not talked about is the incredible economy … and the population growth."
Many investors haven't invested in Africa because of the perception of risk, said Donna Sims Wilson, Houston-based chairwoman of the National Association of Securities Professionals and president of money manager Smith Graham & Co. Investment Advisors LP.
MiDA aims to change that perception, she said. MiDA has a 45-member advisory council "to educate, expose and inspire U.S. institutional investors to invest in infrastructure in Africa," Ms. Wilson said.
MiDA's advisory council includes representatives from $361.1 billion California Public Employees' Retirement System, Sacramento; $228 billion California State Teachers' Retirement System, West Sacramento; $151.4 billion Texas Teacher Retirement System, Austin; San Francisco City & County of Employees' Retirement System; and the $7.8 billion University of Chicago endowment, she said.