INVESTMENT INTERVIEW: “The South African Renewables Programme (REIPPPP) has attracted investors from all over the world and has also favoured the emergence of a new class of African financial investors such as AIIM.”

1.    Let’s start with some background on AIIM and your role there?
African Infrastructure Investment Managers (AIIM), is Africa’s largest and most experienced private equity investment managers focused exclusively on infrastructure. It has a strong track record of 18 years of investing in Africa and has raised over US$2 billion across seven funds in the power, telecommunications and transport sectors in sub-Saharan Africa. AIIM has a diversified investment portfolio spanning 40+ investments in 15 countries with the largest team on the continent dedicated to African infrastructure fund management.

I head-up AIIM’s Investment Team, which comprises 18 people based in Abidjan, Cape Town, Lagos and Nairobi. As such, I oversee the business development, deal origination and investment activity across the continent.

2.    What is the most exciting infrastructure or energy project you have worked on in Africa so far?
The continent’s energy revolution is seeing rapid progress in off-grid and distributed power solutions that will enable African communities to leapfrog the old infrastructure and be at the forefront of new energy technology (innovative financing models are accelerating this change).

We recently invested into Starsight Power Utility, a Nigeria-based energy services company offering solar-diesel-battery hybrid and efficient cooling and lighting solutions to its commercial and industrial clients. The company is in the process of rolling out its services to a number of core clients in the financial services and energy sectors, and has a target pipeline of over 1000 sites in the medium term.

As long-term infrastructure investors, we want to make both a positive and sustainable impact, as well as targeting investments with attractive return profiles. Starsight is offering a unique solution for companies that will reduce their cost of power and improve their ease of doing business.

3.    AIIM has been investing in African infrastructure since the year 2000. How has the investment environment changed in recent years?
Right now, the economic conditions for private equity investors are improving, with more deal flow and better pipeline visibility. Certainly, it’s a rosier picture than a few years ago when the global economy slowed, affecting Africa’s major economies. The improvements are encouraging and reflect Africa’s status as the world’s fastest urbanizing continent. With a strong demand for new infrastructure (estimated to require around $170bn a year for the next decade, according to the AfDB), one of our industry’s biggest challenges is sourcing and securing the best investments that deliver value. A deep local presence and geographically diversified  portfolio are essential in doing so. We opened our fifth offices on the continent, in Abidjan, last year to support our investments and projects in Francophone Africa, which represents currently c. 35% of our pipeline.

At AIIM, we also look at leveraging dynamic private sectors and entrepreneurial spirit by teaming up with local developers, management teams and partners. This has been a key ingredient to our success in investments such as Azura-Edo, Cenpower and Albatros Energy, and we are committed to developing the next generation of business leadership potential.

Lastly, our partners (developers, management team etc.) want more than capital, and we see our ESG expertise as one of our key differentiating factors. ESG analysis is embedded in our investment process, investment decisions and daily operations.

4.    What in your view is the biggest misconception that people have about investing in Africa?
In the current global context of increasing amounts of capital chasing fewer attractive deals, and driving down returns in traditional markets, Limited Partners (LPs) are increasingly looking to new markets to achieve their return objectives – and Africa can offer this.

We are seeing greater interest from the international LP market than at any time previously. It is however important to note that the African private equity industry is still at an early stage of development relative to the traditional markets. As a result, the key focus for the industry needs to be on educating the various stakeholders.

In particular, educating LPs on how to manage risks, and the large gap between perceived risks and actual residual risks for deals. African-based institutional investors are better placed to understand this risk perception and are becoming more familiar with the asset class.

There is also a need to educate governments on the requirements for increased private sector participation and consistency of policies and regulation. Reforms have been enacted in some countries in order to encourage Africa-based institutional investors to allocate capital to the asset class. However, more remains to be done to fully harness private equity’s potential to contribute to Africa’s socio-economic development.

Educating African pension funds, which have a key role to play as an additional pool of capital and are growing at around 20% per annum in some African countries is also key; but they remain a tiny fraction of the global pensions industry. We have been educating a lot of Africa-based pension funds on the benefits of investing in infrastructure and how it is a great opportunity for them to invest in their own story. Access to long-term debt financing remains a challenge across the continent and is dominated by Development Finance Institutions. Unlocking local pension fund monies to invest into infrastructure debt will be key for the deepening of local capital markets and the development of the continent’s broader commercial ecosystem.

For a continent where the bad news stories making the international press often cloud out the opportunities, educated LPs investing with experienced General Partners (GPs) who understand the African context will be able to make outsized returns from patient, long-term investments.

5.    Which countries on the continent are doing the right things? Where are the opportunities?
Over the last few years, a number of Independent Power Producers (IPP) reached financial close (Azura-Edo, Cenpower, Amandi, Albatros Energy among them). This trend will continue with new countries, notably in West Africa, embracing the IPP model such as Benin, Burkina Faso, Mali, and Sierra Leone, and will provide investment opportunities in 2018. However, we expect the addition of further generation capacity onto the grid to slow down in the near-to-medium due to:
•    A lack of investment in the transmission and distribution systems, which has not followed the investment in generation;
•    Increased policy uncertainty and competition from State-Owned Enterprises in countries with hybrid models;
•    Cost-reflective tariffs remain elusive across the continent despite the reduction in cost of power generation; and
•    The limited progress in creating a sustainable value chain combined with the deterioration of public finances.

6.    You are part of a panel discussion during the Finance & Investment conference at the upcoming African Utility Week on the topic of: "What are private equity investors looking for in a project?" Can you give us a sneak preview of what your message will be at the event?
The South African Renewables Programme (REIPPPP) has attracted investors from all over the world, putting Africa firmly on the investment map and providing investors with long-term pricing signals that will boost the renewables market across Africa. The REIPPPP has also favoured the emergence of a new class of African financial investors such as AIIM. AIIM has been at the forefront of this last wave, investing in a number of pathfinders IPPs across the continent, such as Azura-Edo, Amandi, Albatross Energy, Cenpower and Kipeto, and building a portfolio of c. 3,000MW in construction and operation across thermal and renewable technologies.

Investors look not only for well-structured and transparent procurement processes; but more importantly for scale and a “programmatic development” approach, which will allow them to drive price down (as illustrated by the South African REIPPPP).

7.    What is your vision for the energy sector on the continent?
Over the last 20 years, there have been three major IPP investment waves in 1999, 2008, and 2012. However the last wave has seen three major structural changes:
•    Emergence of “programmatic development” such as the South African REIPPPP, Uganda GETFiT or IFC Scaling Solar;
•    The development of renewable energy, which now represents an increasingly attractive alternative to fossil fuels; and
•    A broadening and more liquid investor base.

To reduce its power deficit, Africa needs to unlock large-scale investment in its power sector. This will require the implementation of reliable domestic policy frameworks and the development of the right institutional capacity. It will also require well-structured and transparent procurement processes and a “programmatic development” approach in order to build the credibility necessary to attract international investment on the scale needed.

Renewable energy has become an increasingly attractive alternative to fossil fuels, as renewable energy tariffs have approached or decreased below grid parity in a number of Sub-Saharan African countries, providing sustainable and affordable electricity. Africa has vast untapped renewable energy potential, with 8 of the top 35 developing countries with the highest in renewable energy reserves (normalized by annual domestic energy consumption) located in Africa. As a result, renewable energy is expected to make up 40% of Sub-Saharan African generation capacity by 2040 (compared to 20% in 2012), accounting for almost half of the growth in overall power supply in the region.

8.    What are you most looking forward to at the event?
Meeting with utilities CEOs, regulators, relevant ministers and other key decision makers to develop a sustainable value chain and attract more private sector investment.