Don't let fear keep Africa off limits

When investors hear about opportunities in Africa, their initial reaction may be to dismiss them as too risky. Stories of political upheaval, natural disasters, famine and corruption often populate international news headlines about the continent.
Beyond the headlines, however, lie stories of innovation, improving governance and unprecedented growth in many of the 54 diverse countries that make up Africa. The time is ripe for Organisation for Economic Co-operation and Development (OECD) investors to begin exploring potential opportunities on the continent.

The investment opportunity
Mobilizing Institutional Investors to Develop Africa’s Infrastructure (MiDA), a partnership between the United States Agency for International Development (USAID) and the National Association of Securities Professionals, commissioned Mercer to develop a report, for which seven OECD asset owners were interviewed about their perceptions of the risks and opportunities in African infrastructure, along with four asset managers who are investing in infrastructure on the continent. The findings were surprising in a number of cases and support the argument that investors should learn more about related opportunities.

Low default rates…
A Moody’s report on global project finance default rates found that African projects defaulted at a rate of 5.3 per cent between 1990 and 2016, less than half the default rate in Latin America, which exceeded 12 per cent, and far lower than in Asia, where defaults occurred 8 per cent of the time. In fact, the average across all global regions was 5.4 per cent, meaning African projects were statistically less likely to default than the average global project. Only Western Europe and the Middle East had a lower default rate.
A paucity of data and Africa’s relatively low number of projects overall may indicate that only highly structured and risk-mitigated projects are seeking financing there in the first place; this would be a reflection of the key role development finance institutions (DFIs) and some private infrastructure investors continue to play in the region by helping local governments develop enabling policy frameworks and investable project pipelines

Paired with strong credit spreads
Investec Asset Management interviewed industry experts across global regions to assess potential credit spreads and found there is, indeed, a premium in Africa. For example, senior project finance debt in Africa (with a spread between 400 and 600 basis points) was priced in line with OECD market mezzanine debt (about 550-600 bps). African subordinated project finance debt ranged between 600 and 1000 bps, in spite of the low default rate Moody’s identified.

Research by South Africa-based asset management firm African Infrastructure Investment Managers shows that investments made in African infrastructure projects from construction through maturity (i.e., greenfield) are able to target dollar returns on the order of 20 per cent. Investments made once projects are operating (i.e., brownfield) offer dollar returns in the low-to-mid teens. It seems clear that with appropriately structured deals and adequate due diligence, investors can achieve strong risk-adjusted returns.

The impact imperative
The United Nations adopted the Sustainable Development Goals (SDGs) in 2015, which collectively seek to eradicate all forms of poverty by 2030. The SDGs commit all signatories to achieving sustainable development across economic, social and environmental dimensions; therefore, they are quite comprehensive in scope. Meeting them will be a global challenge requiring public, private and civil sector co-ordination. This is particularly true in southern Africa which, as a region, ranks lowest or near the bottom on most SDG indicators.
Poverty by region
Region % of population below international poverty line
Central Asia 10
Eastern Asia 1.8
Eastern Europe 0.1
Latin America and the Caribbean 4.5
Northern Africa 2.7

Max Messervy is senior responsible investment consultant at Mercer.

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