Infrastructure investing within the wider alternative investments ecosystem

Alternative investments include private assets such as Private Equity, Private Credit, Infrastructure Investing, Private Real Estate and Hedge Funds. They are generally complex, and less liquid compared to listed assets. As a result, they typically require a longer-term investment horizon to be able to yield the envisaged social and financial returns. The purpose of this article is to highlight one subset of alternative investments – Infrastructure Investing.

Definition of Infrastructure

“The basic physical structures and systems (e.g., buildings, roads, power supplies, water supplies and communication networks) for the provision of utilities or services and constructed for public use or enjoyment.” – from ASISA Infrastructure Taxonomy

Why Infrastructure Investment is needed

Infrastructure forms the backbone of every economy, enabling economic and social development.” – from The Principles for Responsible Investment (PRI)

Since Infrastructure Development is an integral part of economic growth and development, there’s been a growing body of research on its impact. This research has consistently shown its ability to unlock economic growth, especially in communities that have historically operated without adequate access to basic amenities. Many of these amenities are essential for the efficient production of goods and services, transport and trade – all of which spur economic growth, which in turn helps to reduce poverty.

Infrastructure in South Africa

Within the South African context, the government has historically held the key responsibility for infrastructure development, with infrastructure generally seen as a ‘public good’. Current research shows a significant and widening infrastructure deficit. Recent reports indicate that Gross Fixed Capital Formation as a percentage of GDP hovers around 18%, which is not only materially lower than our emerging market peers, but also significantly below the national target of 30%. Pursuantly, the scale of investment needed to solve our infrastructure deficit dictates that we can no longer rely only on the government to drive this investment class. This is exacerbated by the deteriorating national fiscal position. The private sector should play a much more prominent role in this regard – a role as significant as we continue to see in the successful rollout of REIPPP.

Why Infrastructure Investing is suitable for the retirement industry

It’s an investment in tangible assets that make a positive social and environmental impact without compromising returns.

From a portfolio construction perspective, research shows that infrastructure investments exhibit a low correlation with traditional/vanilla assets such as equities markets and therefore have an innate portfolio diversification benefit.

They are inflation-linked, long-term assets with a lower cash-flow risk compared to traditional investments.

Prescient’s history in the infrastructure space

As a fiduciary asset manager, the products we invest in are an indication of our beliefs, attitude and overall philosophy in terms of sustainability. We create and develop products that are channelled towards advancing various responsible investment and/or ESG-related goals.

One of our ESG-centric products is the Prescient Clean Energy and Infrastructure Debt Fund, which primarily invests in various clean energy projects across the country. It allows us to contribute to the advancement of numerous developmental and sustainable goals while delivering attractive returns. The projects we invest in are aligned with the United Nation’s Sustainable Development Goals, in particular SDG 7 (Ensure access to affordable, reliable, sustainable and modern energy for all) and the Paris Agreement. The Fund was launched in 2015 and has supported 17 clean-energy and infrastructure projects, most of which are operational.

The Fund’s performance has shown that we can make a meaningful difference in the local context without compromising client returns.

Next steps for Prescient

Consistent with our view that infrastructure development is critical in reinvigorating economic development in South Africa, we are in the process of launching our second Clean Energy and Infrastructure Debt Fund, which seeks to support renewable energy and infrastructure projects, primarily through debt funding.

In addition to offering clients access to real assets which aren’t generally available in the market, the Fund will continue to make a meaningful contribution to economic and social development in South Africa, including – but not limited to – the following areas:

• Improved infrastructure, including access to basic services, water, housing and healthcare.
• Sustainable energy development.
• Job creation.
• Local content and local ownership at project level.

Given the positive ESG screening the Fund will use, along with the expected meaningful impact of the underlying infrastructure projects we’ll be looking to invest in, we believe it to be a Socially Responsible Investment Vehicle.

Specifics of Fund 2:

• Launch date: 6 September 2021.
• Open-ended in nature and initially targeting a fund size of R2 billion. To date, we’ve received hard commitments from investors in our existing fund to the tune of R700 million.

Conclusion:

Investment in infrastructure has an incredible ability to unlock economic growth which, in certain cases, can be localised to communities in which projects operate. This not only helps to create jobs, but also to drive SMME development (local content procurement) and an inclusive economy through local ownership.

Prescient Investment Management has a proven track record in the credit/fixed income space and the CEIDF investment team has significant experience across unlisted, project and infrastructure finance areas of expertise. Our blend of a systematic and fundamental investment approach allows us to make appropriate and objective investment decisions, which have enabled us to deliver the returns shown above.