With the African infrastructure gap estimated to be over $100 billion per year and rapidly growing, the space offers diverse opportunities for LPs, with digitalization now also driving demand. Paul Frankish [pictured] investment director at African Infrastructure Investment Managers (AIIM) explores strategies to bridge this infrastructure investment gap as a driver of economic growth across Africa. AIIM has previously been recognised as Infrastructure Investor of the Year at the Private Equity Africa Awards.
Africa holds immense economic potential, bolstered by its abundant natural and human resources. However, for the continent to fully realise this potential, investment in infrastructure is crucial. Currently, there is a significant gap between the demand for high-quality essential infrastructure and the available supply.
From an infrastructure standpoint, Africa is the most underserved market in the world. The annual infrastructure expenditure, as a percentage of the required investment, is the lowest compared to any other region globally, standing at a mere 25%.
Despite this gap, Africa’s markets offer a range of investment opportunities, each with its own level of investability and exposure to global macro-economic pressures. Seasoned investors can capitalise on these diverse markets by targeting specific sectors and investing in select secular themes. This approach not only provides protection against cyclical pressures but also supports high growth and attractive returns on a risk-adjusted basis, thanks to the long-term structural infrastructure deficits.
Burgeoning Opportunities
As traditional markets experience slowdowns, global investors are increasingly turning their attention to Africa’s expanding infrastructure projects. These opportunities offer the potential for long-term returns that align with the requirements of investors’ portfolios.
Similarly, local institutional investors are recognising the value of infrastructure investment opportunities as their portfolios mature. They are now seeking sustainable, inflation-linked investments that can provide long-term stability.
When examining the potential impact of infrastructure on achieving specific goals, the infrastructure industry in Africa is capturing considerable interest and funding from various investor groups. This trend is further reinforced by the continuous enhancement of impact assessment and management tools.
Digitalisation Demand
Within this crucial infrastructure sector, three of the most appealing sustainable investment prospects include digital infrastructure, energy transition, and logistics, encompassing mobility. These sectors benefit from substantial demand and positive long-term growth projections. Moreover, they are less affected by the macroeconomic challenges that many African markets are currently facing.
Throughout the continent, there is a notable increase in data consumption and smartphone usage, alongside the rapid expansion of 3G, 4G, and 5G networks to meet connectivity needs. The digital economy has the potential to contribute more than $700 billion to Africa’s gross domestic product (GDP) by 2050. Additionally, expanding connectivity to 75% of the population could result in the creation of over 44 million new jobs.
Nevertheless, to sustain the momentum of the digital revolution, significant investments in related infrastructure are essential, particularly in fibre-optic broadband, telecommunication towers, and data centers.
Demand for data centers alone is projected to outstrip supply by 300% in the coming years. It is crucial to have high-capacity, energy-efficient facilities to meet this growing need. For instance, the N+One data center platform in Morocco, backed by AIIM, is leading the way in this sector within the country. The company caters to both local and international enterprise demand, with plans for significant expansion through new facilities in the region. We injected $90 million into this new platform in 2023.
Catapulting Urbanisation
The need for infrastructure will also be fuelled by rapid urbanisation, which is occurring at twice the rate of India and China. Substantial investments will be necessary to modernise Africa’s mobility and logistics sectors. Additionally, the global demand for Africa’s battery mineral reserves and agricultural products will further drive the need for infrastructure.
A focus on integrated corridors to facilitate efficient transportation solutions across battery metal and agriculture value chains is essential. This was a key factor in our decision to invest in The Logistics Group, which has shown strong performance driven by global sector demand. In 2022, we acquired a 74% stake in the company through a deal valued at around $109 million (R1.6 billion).
To ensure that this development progresses as anticipated, there must be a considerable increase in electricity supply, which serves as the engine for growth. Current centralised generation and grids have not met power provision goals, leading to heavy reliance on costly and polluting diesel generators.
This presents a significant investment opportunity for operators to offer clean power directly to commercial and industrial clients. This will enhance the reliability of power supply, reduce carbon emissions, and lower supply costs. Starsight Energy, a distributed solar platform based in Nigeria, is a prime example of our success in this sector. Our initial investment in the company in 2017 has resulted in average revenue growth rates exceeding 100% since then.
Bright Strategies
Africa presents a multifaceted and diverse investment market. The infrastructure sector continues to hold immense importance in these markets, offering substantial investment prospects when approached with a well-structured strategy based on extensive local knowledge.
Hence, we are currently in the process of raising funds for the African Infrastructure Investment Fund 4 (AIIF4), with a target of around $500 million (€454 million).
The involvement of global investors in this sector opens up avenues to attain favourable risk-adjusted returns and make a significant impact on a region that is projected to contribute significantly to global growth over the next decade.
