This article is sponsored by OMAI
Calling Old Mutual Alternative Investments’ joint CEO Paul Boynton in Cape Town from London, the line stutters. A power cut has debilitated the mobile phone towers in Boynton’s local area, causing disruption. It highlights a point Boynton has been emphasising for years: the pressing need for more and better infrastructure across Africa, and in the absence of government fiscal capacity, the private sector’s part in delivering essential services like power generation and communications. According to the African Development Bank, Africa’s annual infrastructure investment requirement is $130 billion-$170 billion.
Has the pandemic reshaped the private sector’s role in filling the infrastructure investment gap?
Before covid-19, governments and multi-lateral aid could cover no more than half of Africa’s infrastructure investment requirement. The pandemic has further tightened fiscal constraints. Governments have had to spend more to manage the crisis, and all the while the tax base weakens. But the need for infrastructure investment remains the same and the potential for private sector participation is enormous.
We have already seen this in South Africa’s renewable energy space, where the government has run a world-class procurement programme and, in the process, has mobilised $20 billion of private capital. OMAI has invested in 27 of these renewable energy projects through its infrastructure business, African Infrastructure Investment Managers. There’s a huge pipeline of potential infrastructure opportunities that African governments could similarly leverage private capital into.
What effect has covid-19 had on OMAI’s portfolio?
For Africa as a whole, it is still early days in relation to the pandemic. The situation in South Africa lags Europe by at least a month and the rest of Africa is further behind. OMAI has a diversified portfolio including businesses that, beyond dealing with staff safety, cases of sickness and remote working, have been relatively unaffected commercially by the lockdown. For our power assets, which enjoy contracted revenue streams, it is business as usual.
At the other end of the spectrum we are invested in retail, tourism, restaurants and cinema businesses, some of which remain closed or are operating at reduced revenues. For some portfolio companies we have had to review their liquidity position, working capital requirements and bank facilities, as well as our level of support. For some, their business model will have to undergo a profound change to remain sustainable. Other areas, such as affordable housing, where we are involved in development and rental, have been modestly impacted, and prepared food and food production has in fact benefitted from increased stay-at-home eating. E-commerce has had a relative boost and our retail exposure in this area has benefitted.
The fiscal capacity of African governments to respond to the pandemic’s economic impact is different to that of US or European administrations. African governments are active but limited in their ability to support even big businesses. They cannot underwrite furlough schemes at 80 percent of staff salaries, as some countries have done. The South African government has made a reasonable amount of budgetary capital available but much of it is reworking what’s already in the system. There will be layoffs and closures.
How has it impacted fundraising?
Both raising capital and deployment have been affected. OMAI is fundraising across the board, including in the impact space. Establishing new relationships is trickier in this environment. However, we have become closer to existing LPs by sharing what we are doing and how we are thinking.
Many LPs have been focused on leveraging capital elsewhere rather than re-upping in new funds. But we continue to have conversations around committing capital and LPs have made allocations during this difficult period.
What will the recovery look like?
In South Africa, where the economy has started to emerge from lockdown, retail has bounced back strongly. Whether that is sustainable is unclear. Our economists are predicting quite a rapid rebound overall next year after a big drop this year. But it is not until 2022 that we get back to pre-covid-19 levels for the economy. Obviously, that is detrimental to employment. As a firm, OMAI will manage businesses’ cost bases in line with future activity, which might be significantly reduced compared with pre-covid-19 levels.
On a positive note, agriculture plays a significant part in African economies and has been less impacted by the pandemic. OMAI is exposed to the sector through UFF African Agri Investments. The sector demonstrated a strong first quarter in South Africa, and second quarter results will also be robust because of the weak exchange rate, which is good for exports.
And while it is never a good thing for businesses to fail, it does present an opportunity to take market share. OMAI has been looking at those opportunities. The move to online prompted by covid-19 and the change to business models is another big focus area for us.
OMAI is an active impact investor in retirement accommodation, affordable housing and education. How will this space evolve?
In affordable housing, our rental programme has held up well. Tenancies haven’t dropped off as much as expected. We have slowed greenfield development, initially because contractors were not allowed on site during lockdown. Now, we’re not sure what future demand for new houses will look like.
Similarly, with retirement accommodation, we are not pushing hard. Our concern has been limiting residents’ exposure to the virus rather than selling. In education, there was modest attrition in fee payments when schools closed during lockdown. Going forward, we will coordinate with parents to establish a plan that works for them.
Will ESG become more prevalent post-pandemic?
For African managers, development finance institution money has always been an important source of capital and that has driven an historical focus on environmental, social and governance issues. That said, covid-19 has emphasised to both GPs and LPs the imperative to assess long-tail risks.
We recently issued our first digital sustainability report, which we hope will make the data more accessible. We identified 90 variables to measure progress on 12 of the UN’s 17 Sustainable Development Goals where we believe we can drive the most impact given the nature of the investments we are involved in. We are targeting a reduction in our companies’ carbon footprints, advancement of South Africa’s transformation agenda that seeks to increase black participation in the economy, and gender diversity. With this data, we can have conversations with management about targets and compare progress.
What longer-term trends underpin the investment opportunity in Africa?
Africa is nearing an inflexion point. The market benefits from four distinct macro advantages that I expect to play out in a positive way over the next decade. First, the population is growing at an extraordinary rate and urbanisation is accelerating: the population is expected to double by 2050 and urbanisation is occurring at a rate of 24 million a year, twice the rate of India or China.
Second, Africa’s natural resources endowment is huge. It contains almost a third of the world’s mineral endowment and around two-thirds of the world’s uncultivated arable land. Third, Africa is moving forward from a governance point of view. Lastly, the African Free Trade Agreement came into force last year with the goal of promoting intra-African trade and integrating the continent into global value chains. For that to happen, we need infrastructure, including ports and roads.