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.
“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.”
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.”
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.