5 October 2023
Recent changes to Regulation 28 allow pension funds to allocate up to 45% to infrastructure investments.
The benefits of adding infrastructure to a portfolio include diversification, reduced volatility (particularly from infrastructure debt allocations), more resilience in changing markets conditions, etc. Infrastructure investing can act as a catalyst for stimulating long-term economic development and growth and is a vital element of a country’s economic growth strategy.
In larger, more mature markets, like the U.S., Canada and Australia, pension fund allocations to infrastructure average from 8 – 12%. South Africa’s domestic pension fund allocations are still hovering at less than 1% of total assets.
While some of the reluctance to increase allocations is linked to factors such as limited insight into the asset class on the part of trustees and liquidity constraints often associated with this asset class, the relatively small investible universe in SA plays a significant part.
The brief analysis below focuses on the limited universe of infrastructure assets available to local investors.
The only dedicated infrastructure investment vehicle listed on the JSE had a market capitalisation below R250m at the time of writing. A few more counters have listed on the Cape Town Stock Exchange but market caps are below R250m. While Telkom (which is majority state-owned) controls vast tracts of communication infrastructure across South Africa, it comes with broader operational risks that makes it difficult to classify it as pure infrastructure.
Turning to the domestic bond markets, the picture does not get much better. As of July 2022, the total SA bond market was estimated at R5.6 trillion. We have carved out traditional State-Owned Enterprise (“SOE”) bond issuances from the analysis for two reasons. Regulation 28 specifically excludes debt issued by or guaranteed by the South African government and like Telkom above, SOE’s generally face a myriad of challenges that makes it difficult to classify these issuances as traditional infrastructure investments without direct or implied government support. Of the three designated impact bond categories defined by the JSE, i.e., green bonds, sustainability bonds and social bonds, some of which may comprise infrastructure type bonds, total bond issuances in these bonds categories amounts to a measly R46 billion since 2014. A summary of the issuances is set out below. Of particular concern is that total issuances in 2023 year to date amounts to R6.3 bn, 67% down from 2022. Green or developmental bond issuances seem sporadic at best with no clear trends emerging.
Source: Mergence Investment Managers
- Private Markets
Through private market allocations, investors can access a more diversified and broader universe of infrastructure debt and equity investments. This universe includes economic infrastructure such as clean energy, digital infrastructure, water infrastructure, and social infrastructure such as healthcare, affordable housing, and student accommodation to name a few. Coupled with attractive financial returns, these investments also offer pension funds the often-unsung benefit of knowing and actually seeing the impact and meaningful contribution their members’ savings have made to the economy and the socio-economic environment we live in.
In closing, our analysis clearly indicates the most accessible route to infrastructure investments remains through the private markets. However, investors do need to proceed with caution and ensure that they appoint credible and experienced asset managers with a demonstrable track record and a deep understanding of the risks in the sector.
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