A mismatch exists between institutional investors and infrastructure projects in Nigeria and across Africa. Institutional investors, such as pension funds and insurers, have a huge appetite for infrastructure investments but struggle to find projects that match their investment requirements. The issue is not about willingness to invest but rather about the form in which infrastructure projects are presented. Many projects are too small, and investors face challenges in evaluating, underwriting, and monitoring them.
The issue of ticket size is a significant challenge. Institutional investors typically require large investment opportunities, often in the hundreds of millions of dollars. However, many infrastructure projects in Africa are much smaller, often around $20 million. This makes it economically unviable for investors to evaluate and monitor these projects using the same due diligence infrastructure they use for larger projects. As a result, many viable projects are invisible to investors who could potentially fund them.
Liquidity is another major issue. Many institutional investors require a plausible exit or secondary-market path, which is often not available for direct infrastructure investments in emerging markets. Additionally, tenor and currency create friction, as infrastructure assets generate revenue over long periods, often in local currency, while institutional capital is often denominated in hard currency. This creates a mismatch that makes it difficult for investors to invest in infrastructure projects.
Governance and reporting standards also add friction. Institutional investors typically require audited financials, standardized reporting, and governance structures that many individual project sponsors are not equipped to produce. Pipeline visibility is also crucial, as investors need to see a pipeline of comparable opportunities to justify building internal capability and underwriting expertise. Unfortunately, this pipeline often does not exist at scale in many African infrastructure markets.
Transaction costs are another significant challenge. The costs of legal, advisory, and structuring services are often similar in absolute terms for small and large projects, which means they consume a disproportionate share of returns on smaller projects. This makes it even more challenging for investors to invest in smaller infrastructure projects. The mismatch between institutional investors and infrastructure projects is a structural issue that requires a deliberate architecture to transform fragmented opportunities into investment products.
Capital intermediation is a critical function that is underinvested in the industry. It involves transforming individual, often modest, projects into investment products that institutional capital can absorb, evaluate, and hold. This requires a deep understanding of the needs of both investors and project sponsors. By addressing the structural barriers, it is possible to increase access to capital for infrastructure projects in Africa and bridge the infrastructure gap.
The issue of access to capital for infrastructure projects is complex and multifaceted. It requires a comprehensive approach that addresses the structural barriers and mismatch between institutional investors and infrastructure projects. By understanding the needs of both investors and project sponsors, it is possible to create investment products that meet the requirements of institutional investors and provide much-needed capital for infrastructure development in Africa.
Key points
- Institutional investors face structural barriers investing in African infrastructure projects due to ticket size, liquidity, and governance issues.
- The mismatch between institutional investors and infrastructure projects requires a deliberate architecture to transform fragmented opportunities into investment products.
- Capital intermediation is a critical function that can increase access to capital for infrastructure projects in Africa.
