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DealMakers - Q1 2024 (released May 2024)

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Bridging Gaps: the art of infrastructure investment in South Africa

by Anneline Sonpal and Malcom Mangunda

South Africa’s infrastructure sector combines significant challenges with vast potential, making it a prime target for private equity investment.

 

As urbanisation and population growth accelerate, it is projected that there will be a R4,8 trn funding gap by 2030, underscoring both a critical concern and a compelling opportunity for investors. Over the past decade, the population has surged by 30%, intensifying the need for robust infrastructure development, and presenting an attractive prospect for private equity firms. Reflecting this urgency, infrastructure investments constituted over 36% of total private equity inflows in Southern Africa in 2022, according to the Southern African Venture Capital and Private Equity Association (SAVCA). This substantial share highlights the sector’s importance, and its promise for significant returns.  

 

Recognising the growing demand and attractiveness of infrastructure investments, we address three pivotal questions that have emerged from our decade-long experience with infrastructure private equity funds: How can we target plays to achieve growth with minimised risks in volatile markets? How can we creatively source competitive deals within these target plays? And what are our options when deals in our target plays are not available?

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Anneline Sonpal
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Malcom Mangunda

Where to play

Before delving into the strategies for success, it’s crucial to understand "where to play" – that is, how to identify viable market sectors that offer the best investment opportunities. Investors should consider three factors: conducting a market opportunity analysis to check for end-user demand or government support; evaluating asset availability through recent venture capital deals; and assessing how these opportunities align with the firm’s capabilities. These elements create a robust starting point for future strategic endeavours.

 

How to de-risk portfolio growth

To mitigate risks in portfolio growth, investors should focus on two main strategies: identifying value chains linked to global megatrends, and constructing scalable platforms.

 

-Identifying value chains positively linked to trends: This entails identifying viable investments by mapping and investigating value chains in infrastructure sectors bolstered by megatrends, such as the green economy, urbanisation, social development, agriculture and food security, and smart infrastructure and technology. These megatrends ensure continuous demand, fostering industry growth and reducing risks of demand fluctuations. For example, in the renewables sector, Singular has observed investments encompassing both photovoltaic manufacturing and energy services merged with site and construction management, as well as operations. In logistics, we have seen the establishment of an integrated logistics, ports services and cold storage platform.

 

-Building platforms to de-risk growth: Investors can further mitigate growth risks by using their existing competencies to sell similar products to new customer segments, thus achieving growth through market diversification. For example, expanding their addressable market presence from investments in companies that solely target the grid, to selling solar generation directly to consumer and industrial segments, allows firms to minimise risk. This proximity to core operations enables testing opportunities before making substantial investments, and capitalising on market opportunities early, requiring very little time to develop new products/services. Additionally, entering new value chains enhances financial stability by diversifying revenue and creating resilience against market shocks.

 

How to creatively source investment options

In the competitive landscape of infrastructure investing, innovative sourcing is essential to access new growth avenues.

-Substituting imports for local production: Investors can explore opportunities in local value chains that are overly reliant on imports. By partnering with key importers – especially from regions like China – to establish local production, firms not only fortify local industries, but also gain an early-mover advantage. This strategy can lead to competitive dominance, as previously imported goods are replaced with locally produced alternatives.

 

-Influencing policy to unlock growth: Additionally, investors can identify sectors that are ripe for growth, but are currently hindered by restrictive policies. By understanding policymakers’ interests, and demonstrating how their investments align with those interests through a compelling case (e.g., through case studies or impact calculations), investors can advocate for beneficial changes. Such advocacy can open new growth avenues and secure an early-mover advantage. For instance, reforms that encourage renewable energy adoption can create a conducive environment for investing in solar and wind projects.

 

-Identifying carveouts from non-infrastructure companies: Targeting carveouts from sectors like retail, oil and gas, mining, manufacturing and pharmaceuticals offers strategic acquisition opportunities that are less competitive and potentially undervalued. These companies often possess extensive but underutilised infrastructure assets, presenting ripe opportunities. By systematically identifying these assets, from physical infrastructure to logistical capabilities, firms can integrate them into their existing operations, creating synergies and enhancing portfolio strength.

How to move outside of your core sectors 

Diversification is critical, particularly as current sectors begin to saturate, and given the dynamic nature of infrastructure investments tied to external developments (e.g. rise of the internet, shifted investments to new areas like data centres). Investors should consider investing in emerging sectors to spread risks. While this requires significant time and resource investment to build new competencies, the benefits of diversification can lead to early-mover advantages and increased funding by addressing critical infrastructure gaps. However, expanding into less familiar sectors can dilute a firm’s focus, unless managed with a clear strategy. The aim should be to select sectors where the firm can use its existing strengths or acquire new competencies that complement its core operations.

 

Closing Thoughts

Investing in South Africa’s infrastructure sector offers lucrative opportunities, but demands strategic foresight and adaptability. By de-risking portfolio growth, sourcing investments creatively, and diversifying into emerging sectors, investors can thrive in this dynamic market. As South Africa progresses, wise investors can play a pivotal role in driving development while earning substantial rewards.  N

 

Sonpal is a Partner and Mangunda an Associate | Singular Group.

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