African infrastructure, an asset class underserved by insurers

Looking specifically at investments in African infrastructure, Sanjeev Gupta executive director for financial services at Africa Finance Corporation (AFC) says there is a big gap in terms of the money coming in from insurers and pension funds to finance these projects.  

AFC is a pan-African multilateral development finance institution (DFI). Its shareholders are public and private, and focuses exclusively on five sectors: power, transport, telecom, natural resources and large industrial projects.  

Meeting with Insurance Asset Risk on the side lines of AFSIC 2019, Gupta who used to head the emerging markets operation at South African insurer Sanlam’s investment affiliate, says a couple of hurdles remain for insurers to invest in the asset class.  

First and foremost, most African countries, apart from South Africa, Nigeria and Kenya do not have a large contractual savings industry. Then infrastructure is seen as very long term, low yielding, difficult-to-exit asset class, so insurers tend to avoid it. Finally, government debt tends to offer better returns for less risk, so asset managers tend to focus on that.  

“Actual availability of funds, the fear factor around risk taken and the choices [insurers] have to invest in safer assets [are all hurdles],” he summarises.  

“We are trying to address that, not because we are noble, but because we believe that long-term infrastructure development in Africa can’t happen without local currency funding and we want to create structures for pension funds to [mitigate the risks they otherwise wouldn’t take].” 

Gupta lists three solutions AFC participated in. First it is a founding shareholder of InfraCredit, a specialised guarantor for infrastructure credit in Nigeria. The main objective of the company is to unlock local pension funds and life insurers’ investments in infrastructure loans. Gupta is on the board of InfraCredit.  

Another initiative by AFC is to set up an equity fund for African pensions and life insurers to invest in. “They are beginning to bite,” Gupta says.  

Finally, he says, AFC offers co-investment opportunities to insurers and pension funds. With its ability to structure deals and its “A-” credit rating, AFC enhances the whole credit profile of the deal making it attractive for the insurers to join in.  

Insurers’ investments in African infrastructure is beginning to happen, Gupta says. “It is not a big source of capital, but it will change.” 

Africa’s perceived risk  

The perception of risk in Africa tends to get exaggerated, and for many it is misunderstood, Gupta says. “It is fashionable to say it is dangerous; that is what you are expected to say.” 

But at the same time many investors don’t have enough patience and project preparation – an essential element of risk mitigation – is often ignored, Gupta continues. 

And although he admits it is a cliché, investors looking at Africa should expect the unexpected, he says. Political or currency volatility, community issues and external factors are not uncommon.  

“Remember Africa is one of the few continents where external factors alone can kill a domestic economy - oil price, commodity price, terrorism,” he says. “No other region in the world is that vulnerable to factors that is not in their control. So it can happen and nobody can tell you that they can manage that risk.” 

However, overall risk can be managed through diversification across countries and sectors but also diversification within the same project: an investor involved in the project development might elect to not be involved in other stages of the project.  

“You might also choose to be involved in every stage of the project in order to own and control it, which is a risk mitigator sometimes, “ Gupta says.  

“So we like to believe that either through diversification, or through structuring or certain rights at a legal framework level, or through the way we have negotiated the concession agreements or the way we have brought in local partners to partner us takes away a lot of the risk, or at least allows us to manage risk when they arise,” he says.  

In 11 years of existence AFC has invested $5bn across 28 African country. While the level of investment might seem low compared with the balance sheets of insurers, Gupta argues it tells the story of AFC’s risk management. “In 11 years, we only had one non-performing asset,” he says proudly. 

Too much capital  

Speaking to Insurance Asset Risk, Allianz’s Köke argued too much capital is flowing into Africa through the DFIs, depressing returns available from big-project investments such as infrastructure and renewables.  

“Returns from [them] are shrinking because this capital from development institutions is chasing projects and sometimes bidding against each other,” Köke says. “It makes it difficult for private investors.” 

Gupta says he has little patience for this criticism and drops the courteous tone to launches into a passionate tirade.  

“You look at a macro analysis of any country in Africa - you need trillions to get the infrastructure deficit sorted, the education sorted, the healthcare sorted, the roads sorted. Where is the money? How can people say ‘you've got too much money and you are crowding it out’?,” he says.

DFIs also serve a purpose to defend the interest of countries and communities against investors that see Africa as an opportunistic way of making money, structuring deals that would suit their purpose, he continues.   

“Thirdly, and very importantly capital is fungible, it will go where it belongs,” Gupta says. “If you think I’m competing with your capital, it’s your problem. I'm in the business of making money for my investors, I’m crowding it out for whom? For my investors! If you can't compete, if you can't take the heat don't come to the kitchen!"