You are currently viewing our desktop site, do you want to download our app instead?
Moneyweb Android App Moneyweb iOS App Moneyweb Mobile Web App
Join our mailing list to receive top business news every weekday morning.

Is this how SA unit trusts will get exposure to infrastructure?

The structure worked out between Gaia Fund Managers and Kruger International allows for a direct investment into a renewable energy project within a collective investment scheme structure.
The innovative partnership addresses the key constraints of liquidity and regulatory restrictions. Image: Shutterstock

One of South Africa’s economic imperatives is to encourage more private investment into infrastructure projects. As the government has run out of money to finance this kind of development, capital has to be sourced from elsewhere.

It is also in the financial sector’s interest to get involved in this space. Becoming willing investors in infrastructure is the surest way to mitigate the threat of prescribed assets.

The challenge, however, has not been a lack of demand. Asset managers and pension funds see the opportunity in investing in assets that have predictable, long-term, inflation-beating returns.

What has been lacking is both an investible pipeline of projects, and suitable vehicles through which these can be accessed.

Solving the problem

The key constraints are liquidity and regulatory restrictions. An investment into a traditional infrastructure fund would be subject to a multi-year lock-up. It would also not be permitted for unit trusts under the Collective Investment Schemes Control Act (Cisca).

An innovative partnership between Kruger International and Gaia Fund Managers has, however, addressed both of these issues.

“We worked with Gaia, a specialist in secondary market infrastructure transactions, to find a way for us to include the asset we wanted to buy, which is the Tsitsikamma Community Wind Farm, in our unit trust funds,” says Mia Kruger, director of research and fund management at Kruger International.

Read: MoU signed to launch R100bn infrastructure fund

“We were in a position to acquire a 16% stake in the Tsitsikamma Community Wind Farm, and after a lot of brainstorming around how to structure it in a way that complies with regulations, make it cost-effective and tax-friendly for investors, we decided to list a fund – Gaia Fund 1 – on the 4AX exchange.

“That fund owns the 16% stake in the Tsitsikamma Community Wind Farm. On the day it listed it issued preference shares, and our three local unit trust funds took up all the available preference shares.”

Return

The result is that the Kruger Ci Prudential fund, Kruger Ci Balanced fund and Kruger Ci Equity fund all now hold around 5.5% of their portfolios in Gaia Fund 1 preference shares.

These give direct access to the returns generated from the investment in the Tsitsikamma Community Wind Farm.

“The IRR [internal rate of return] we are looking at, on a conservative level after costs, is around 9% real,” says Kruger. “To put that yield into perspective, the real yield on a 10-year government bond is currently around 7%. We are working on a 2% pickup on that real yield, which we think is attractive.”

Read: Finance institutions commit ‘tens of billions’ to infrastructure

Kruger says the firm hopes to be able to structure more investments in this way in future, to be able to both diversify into more projects, and increase the exposure to infrastructure in its funds.[MK1]

“The idea is to take up other attractive renewable energy infrastructure projects in Gaia Fund 1,” says Kruger. “That will allow us to build our position and come closer to a 10% holding in the Kruger funds, which is the current limit prescribed by Cisca[MK2]. It will also give other asset managers the chance to invest in a portfolio of infrastructure projects through Gaia Fund 1.”

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.

COMMENTS   4

Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.

SIGN IN SIGN UP

“It is also in the financial sector’s interest to get involved in this space. Becoming willing investors in infrastructure is the surest way to mitigate the threat of prescribed assets.”

Sounds like handing your cellphone over to an SA thug before he shoots you dead for it…

…I think my own Retirement Fund will need to do a “hard Brexit” out of SA 😉 Very soon!

Well, not only does an investment in the REIP pay a better yield than government bonds, but it is also less risky. A wind farm or solar plant is more reliable than the government. The weather is unpredictable and fickle, but compared to Luthuli House, it is as solid as rock. You cannot trust your government, but you can trust the combination of nature and human ingenuity.

Infrastructure projects under the goverment’s watch, typically lead to cost-overruns, operating losses, etc.

But when same projects are funded by Unit Trusts, they will (magically) make some profitable returns in the same hands?

Scenario:

A loving father hands the keys of his “car A” to his mischievous, grossly irresponsible snotkop son at varsity, with the words:
“Son, this car is still financed by Wesbank in your dad’s name. Please look after it..here’s the keys. Now, go and enjoy”

The first month barely passed, and the car is written off completely (as expected).

The father hands his other “car B” to the SAME SON, with the words:
“Son, this car is paid for in cash, made possible by a loan from my pension fund, and extended homeloan. Please look after it…enjoy”

What d’you think will happen?
Will Car B be suddenly be washed & waxed every week?? Yeah right…

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: