Local fund managers can assist with the management of the infrastructure development fund President Cyril Ramaphosa has announced, says Ngoku-Sakhile Mazwi, managing director of Bayakha Infrastructure Partners, a majority black-owned specialist infrastructure fund manager.
Bayakha has just partnered with Eaglestone Advisory to launch Bayakha’s R3 billion Transformational Infrastructure Fund.
Mazwi says local fund managers with experience in infrastructure investment could support public-private partnerships, which seems to be part of Ramaphosa’s plan to stimulate the lacklustre local economy. By leveraging private funds, the extent of the infrastructure development could be multiplied.
More than 90% of South African retirement savings are currently invested in public listed companies, and both the regulatory environment and international trends suggest a higher allocation to private markets would be appropriate. Infrastructure investment could provide the opportunity to better balance portfolios, Mazwi says.
Such a partnership between government and local asset managers would not only breathe life into the struggling local construction industry and create much-needed jobs, it could also benefit local fund managers and speed up transformation in the industry, Mazwi says.
Bayakha alone has a pipeline of R10 billion worth of projects ready for execution, he says.
Mazwi is passionate about infrastructure investment because it is developmental in nature and has a high impact on communities, he says.
Such investments are highly defensive, which means they deliver returns irrespective of whether the economy is buoyant or struggling. The demand – from hospitals, as an example – for electricity from a power station that one has invested in would not suffer during an economic downturn, he says.
There have traditionally been two ways for investors to access inflation protection, Mazwi explains: opting for either a real return fund, which relies on expensive derivatives, or asset allocation, which really means playing the market and hoping to get it right in the long run.
However, the Department of Energy (DoE) offers a third and very attractive option for institutional investors through its Renewable Energy Independent Power Producer Procurement (REIPPP) Programme – an inflation-linked return that is contractually guaranteed, Mazwi says.
Added to that, there is now a secondary REIPPP market, and the rules favour majority black-owned fund managers like Bayakha – as does the investable universe.
In terms of the REIPPP rules, all equity investors are locked in for three years from the date of commercial operations. Thereafter investors can sell their equity, provided the BEE ownership is not diluted and the DoE is informed of the transaction.
The lock-in period for the first bid round ended in December last year, and that of the second bid round will end this December. Projects in these early rounds did not have great BEE scores, but the power purchase agreements were concluded at high tariffs, providing for risk premiums associated with early investment in an industry that is new for South Africa.
Mazwi says Bayakha is eyeing the first three bid rounds for investment. There are lots of opportunities, with senior sponsors who are selling equity for various reasons. While the opportunities are across all technologies, Bayakha targets wind and photovoltaic (PV) projects.
The DoE’s special dispensation for majority black-owned fund managers to be recognised at a level of 100% black ownership further favours a company like Bayakha, Mazwi says.
The new Bayakha Transformational Infrastructure Fund has a target of 60% of its portfolio to be allocated to economic infrastructure – including the REIPPP programme, transport (including toll roads and rail), water infrastructure such as water treatment plants, and information and communication technology (ICT). A large chunk of this would probably consist of REIPPP projects due to the guaranteed inflation-linked returns, says Mazwi.
The other 40% of the portfolio will be invested in social infrastructure in the health and educational sphere, such as student housing and hospitals.
Mazwi says Bayakha specifically targets townships for the provision of multidisciplinary private hospitals. It would typically partner with established private healthcare groups on such projects and there is currently good appetite from prospective partners, he says.
The fund manager keeps an eye on developments in the health care system to assess any developing risk, he adds.
Bayakha measures returns on a financial and developmental level, and differentiates itself by verifying the developmental impact through the collection of primary data, says Mazwi. “If you go into an economy you try to understand and measure the need [for specific infrastructure],” he says.
The developmental and financial returns go together, he says. One does not sacrifice financial returns to ensure developmental returns. In fact, infrastructure development without developmental returns would carry an increased risk, he says. This could manifest in the form of strikes and community protests that could delay the project and put its viability at risk.
The objective of the Bayakha Transformational Infrastructure Fund is to generate a minimum target internal rate of return of 12% for investors (consumer price index plus 6%). The first round of fundraising is currently open and closes at the end of November. The aim is to raise R1 billion and to increase it to R3 billion within the next two years.
Mazwi says Bayakha’s newly formed partnership with Eaglestone Advisory, a leading independent infrastructure investment banking platform, has strengthened the team and put boots on the ground, especially on the rest of the continent.
Eaglestone bought 25% of the previously 100% black-owned Bayakha. As a result the partnership reflects the diversity of the South African population. Eaglestone also has a lot of experience in the local REIPPPP, says Mazwi.