An oversight into transaction culture in Infrastructure and Energy investments across Africa from a head-hunter’s perspective, influenced by years of candidate conversations.
Direct investment transaction across Africa are worlds apart from those that occur in more mature markets, this comes down to several things. In this blog we will focus around 3 key areas; origination, risk mitigation and closing, I will discuss these key factors from a recruiter’s perspective based on conversation I have had with professionals within the space ranging from C-suite to junior, from Private equity to advisory.
Introduction to the risk/return profile in African markets
Firstly, it is important to understand risk/return profile is often misunderstood in the infrastructure and energy space across Africa. Unlike in more mature markets most investments are unlisted due to lack of developed capital markets, there is little opportunity to invest in liquid stock or bonds of companies developing said projects. Most investments are typical equity or debt, with Greenfields being equity and having more of a higher risk profile due to weak regulatory framework and needing to more patience and thorough strategy, and Brownfield being more debt driven and a lower risk profile, African Infrastructure and Energy debt investments have a lower default profile than other emerging markets and also than some other mature markets (North America).
Origination
Origination and how successful you are, is often heavily determined by your network and this couldn’t be anymore true for African investment. Personal network both in the public and private sector are critical to ensure solid deal flow, as well as also using an extensive network of 3rd party service providers. Unlike mature markets a lot of investments are not “investment ready” and therefore require assistance from advisory firms to produce business plans, feasibility studies, financial analysis and then make introduction to financiers. I have worked with EPC providers who have agreements in place to provide C&I solar for multiple assets from gasoline stations to hotels, office buildings to malls, however the clients have not been able to obtain financing through their own network or on an individual merit. The Kenyan EPC provider asked me to introduce them to financiers who would look at providing finance for the entire project pipeline, to which I managed to provide a number a suitable and interested parties. Investment opportunities really can materialise from anything on the continent, even from your recruiter!
Typical origination process will start with the screening of the investment this is done mainly by junior members of the team in this process we will see initial overview of the proposed investments, due diligence in the form of a deep dive into the market and the conditions around the investment, looking at all associated risk factors along with how to mitigate against these. The team would then look at assessing the potential reward and produce extensive financial models and scenarios to test the investment thesis, in emerging markets it is not uncommon to see these first stages outsourced with a trusted advisor partner.
Risk Mitigation
In emerging markets and especially across Africa risk mitigation and understanding all associate risks is one of the most crucial steps in making an investment. When structuring deals there are ways in which investors go about risk mitigation, the reoccurring theme across investment professionals is the assessment of the off-taker their track record (successful or not), previous financing partners, previous defaults; and then secondly the geography of the project with main concerns around regulatory framework and political risk. (Several sources have reported in a certain West African country as an investor it is etiquette to invite the Minister of Energy for a dinner prior to discussing your intentions and without this you will be declined at a later stage in the process).
If the off-taker doesn’t have much of a track record or there are question marks over their credibility then a common way investors risk is mitigated is via a sovereign guarantee, this ensure that an obligation will be satisfied if the primary obligor defaults. This isn’t always straight forward and will bring geography into consideration as certain Governments are less likely to engage. Often these are used in collaboration with DFI guarantee programs such as those issued by the IFC & MIGA, over the past 20 years World Bank Group instruments have mobilized more than $42 billion in commercial capital and private investments across emerging markets.
When assessing geographic risk there are core elements that are analysed, political, regulatory, resourcing and security exposure. Changes in Government policy and Governments themselves can happen with dramatic effective across the African continent, it can lead to changes in regulation and cause unrest amongst the civilians which in turn can cause lengthy delays or in extreme cases the projects are to be terminated. When looking at a project in its entirety, whether it is a direct investment or an investment into an off-taker, assessing the resources that are available and the reliability in the specified location is a consideration which may be over looked in mature markets. Labour force is critical in infrastructure and energy projects and finding good quality and reliable EPC and O&M contractors can sometimes be very challenging.
Security Risks
Finally, it is critical to take into consideration security risk of the projects, conflict is not uncommon across Africa and organised crime along with rebellions is a real forethought. As a recruit I have had first-hand examples that I have dealt with, including finding c-suite executives for portfolio companies with project interest around the Chad Nigeria boarder, where there is ongoing conflict and the severe risk of kidnapping.
Recently this year we have seen French energy giants Total pause their $20bn LNG project in Mozambique due to security threats in the area. Total as the operator declared force majeure with the construction companies and buyers of the gas giving them breathing room whilst also increasing the pressure on the Mozambican government to resolve the conflict, the Mozambican state had been hoping to reap nearly $100 billion over the next 25 years from the LNG project.
It is worth mentioning that African currency are subject to extreme volatility and currency risk controls need to be implemented, often many projects are US dollarized which will help to minimise currency risk.
These factors are all considered when making an investment decision and hold a significant weight as they can determine whether the project is likely to come to fruition and whether or not it will still be revenue generating in years to come. As previously mentioned when talking about the off-taker, often DFI guarantees will cover a wide array of government-related risks, such as;
- Contractual risk (payment risk, performance risk, etc.)
- Currency risk (convertibility, transferability, etc.)
- Regulatory risk (change in law, negotiation or cancellation of license, tariff adjustments, etc.)
- Political risk (expropriation, war and civil disturbance, etc.)
Guarantees Program (worldbank.org), gl-2018-wealth-investment-opportunities-in-african-infrastructure-full-report-mercer.pdf (mmc.com), Total suspends $20BN LNG project in Mozambique indefinitely | Business and Economy News | Al Jazeera
Closing/Structuring
Once the investment opportunity has been passed through the previous stages and the risk/return profile is a good match for the investor, the deal will then be prepared for investment committee. This is the stage in which the deal will be structured and provide supporting evidence as to why the risk/return profile makes this a good investment. Within emerging markets and especially certain countries across Africa this is where framework and legislation may not be appropriate or in some cases even exist.
A candidate I have worked closely who help design the investment strategy for a leading GP within Africa informed me of an investment where the size of the project was so large that they had to design and implement framework in Cameroon which altered existing Government legislation. The sheer complexity in structuring deals across Africa especially infrastructure and energy transaction shows why it is so important that network and understanding transaction culture from country to country is critical, having influence over both public and private actors will prove to be fundamental cog in the success of the investment.
Infrastructure and energy investment across Africa take patience and persistence as well as a complete oversight of the landscape you are investing in. Naivety will be punished and well calculated decisions against risk have the potential to be fruitfully rewarded. To conclude in the words of Greek philosopher Diodorus “what could happen, will happen” meaning that anything that has a positive probability of happening will certainly happen, sooner or later, in more recent times this was adopted by Captain Edward A. Murphy “what could go wrong, will go wrong”. Investors will do well to remember this when looking to mitigate against risk.
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