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Q1 2021 - (released May 2021)

SA's quarterly Private Equity & Venture Capital magazine

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Harith sees permanent capital vehicles as the future for infrastructure funds

by Micheal Avery

Harith General Partners, one of the largest investors in African Infrastructure, has announced a nearly R3bn (US$200m) capital raise in a follow-up to its Pan African Infrastructure Development Fund (PAIDF) 2, which is open to existing and new investors.

 

The PAIDF 2 Infrastructure Top Up Fund is a shorter-term vehicle (five to six years) that is being established to take advantage of very near-term expansion opportunities in some of the best performing PAIDF 2 portfolio companies, and to realise a mature pipeline of high-quality infrastructure opportunities for investors.

 

Harith’s PAIDF 1 & PAIDF 2 portfolio companies include Aldwych Holdings Limited, one of the largest Independent Power Providers on the continent; leading South African telecommunications infrastructure group, CIVH; MainOne, an undersea cable company and leading provider of innovative telecom services and network solutions for businesses in West Africa; Lanseria International Airport, South Africa’s only privately owned international airport; Beitbridge Border Post, the busiest border post in Southern Africa, and others.

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Emile du Toit, MD: Fundraising & Liabilities at Harith told Catalyst that he’s “very excited about raising this type of fund”.

 

Du Toit says that expanding investment in renewable power projects such as The Lake Turkana Wind Power project in Kenya is high on the agenda.

 

The Lake Turkana Wind Power project is located in the Loiyangalani district in Marsabit County. It is comprised of 365 wind turbines, each with a capacity of 850 kW, and a high voltage substation that will be connected to the Kenyan national grid through an associated Transmission Line, which is being constructed by the Kenyan Government.

 

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Firstly – and perhaps most obviously – is the intellectual property protected? Patents have lost some of their utility as a protection as, even provisionally, the process turns more slowly than the technology world is spinning. Nevertheless, good IP adds value and proves out important claims.

 

Just as important as IP is your human capital. If you are claiming a deep technology breakthrough, are the engineers secured for the future? If you’re claiming wide experience, is that learning secured?

 

Once operational, the wind farm will provide 310 MW of reliable, low cost energy to Kenya’s national grid (i.e. approx. 15% of the country’s installed capacity), which will be bought at a fixed price by Kenya Power & Lighting Company Ltd (KPLC) over a 20-year period, in accordance with the Power Purchase Agreement.

 

“We are also looking at other renewable power opportunities throughout our portfolio holding company, Energy Holdings,” explains Du Toit.

 

“We've got some investments in the digital infrastructure space and fibre assets where we potentially want to

expand our investment in some of these assets and, as you would know, we are currently invested in one of the largest fibre suppliers in South Africa, which includes CIVH and Dark Fibre Africa, which includes both South Africa and the Middle East. And on top of that, we will also look at some of the other transport assets.”

 

The capital raised will be invested in existing PAIDF portfolio company expansion opportunities, as well as in selected new, key pipeline deals and strategic infrastructure investment opportunities. These opportunities are both pre-determined and existing.

 

Turning to the opportunity set in South Africa, Du Toit is encouraged by the proposed Amendments to Regulation 28.

 

“I think it's quite promising,” says Du Toit. “Firstly, the prominence that infrastructure is now getting in these discussions; however, I think with regards to definitions around what constitutes infrastructure, maybe some work needs to be done on that. But in terms of opening up the universe of funds to invest in infrastructure, we definitely welcome the moves.”

 

Du Toit believes that the limits have been set at an adequate enough level at this stage, and pension funds which have previously not invested in this space may start exploring opportunities.

 

“I think the important thing to note, though, is that pension funds and managers tend to prefer investing in listed assets,” he adds hastily. “But if you look at infrastructure development, these are projects of fairly large amounts; they are long term investments and often in the initial stages, it's quite illiquid. And hence, most of these projects are delivered in the unlisted or private equity kind of environment.”

 

And, Du Toit believes that, in the past, that would require a deeper conversation with asset managers and pension funds alike, who would need the project sponsor to open up, to help them better understand the business model and become comfortable with how to invest in private equity, and invest in infrastructure.

 

“I don't think there are many listed entities that offer these kinds of opportunities, and I don't see that changing in the near-term.”

This naturally raises the question about the scope for innovation in the structuring of funds and the creation of listed entry points. Something, Du Toit admits, that Harith has been investigating.

 

 

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“I think the interesting thing that we've been studying quite intensely is the permanent capital model [similar to Ethos Capital]. And, we believe that it is potentially a model that is better suited to the infrastructure investing manual,” says Du Toit. “And we're anticipating that we would also launch a permanent capital vehicle structure for investors as well, at some stage.”

 

 “The exciting element of this, for the country, is that once you see a few more listed vehicles start trading and they gain significant scale, you will see serious activity in that space and a lot of interest, which bodes well for infrastructure funding into the future.”

“But it will take time,” cautions Du Toit. “For the next three years, I think the bulk of investment will still go through either unlisted or private equity fund vehicles.”