DIVERSE PORTFOLIO - JSE MAGAZINE

DIVERSE PORTFOLIO

At this stage of SA’s growth, Gaia’s focus on energy, transportation, water and sanitation development is more pertinent than ever, says CEO Prudence Lebina

DIVERSE PORTFOLIO

When President Cyril Ramaphosa announced in September 2018 that the government’s plan to revitalise the economy would include prioritising infrastructure spending, Prudence Lebina, CEO of Gaia Infrastructure Capital, was delighted. ‘Implementation of the stimulus package implies more investment opportunities for Gaia, and an overall positive impact on the country through increased economic activity in the infrastructure and construction sectors, with resultant employment opportunities,’ says Lebina.

This is important for Gaia because it invests in Southern African operational and/or near operational large-scale energy, transportation, water and sanitation sector infrastructure assets, targeting a minimum of R50 million per investment. ‘We invest in assets through equity as well as other financial instruments, provided those meet Gaia’s minimum target investment return, which is CPI plus 6%,’ she says.

A further condition is that the asset must have visible environmental, social and governance policy appreciation, with acceptable third-party credit risk exposure. Gaia’s objective is to pursue value-adding management and directorship roles in the underlying assets to optimise its potential. The company targets long-term investors – those with an appetite for low-risk, uncorrelated and predictable, inflation-linked, long-term cash flows.

‘This model ideally suits the long-term savings industry because it provides opportunities to match their long-term liabilities,’ says Lebina. ‘Not only are we presenting large-scale infrastructure assets that they would not ordinarily have access to, but the investment case is rather attractive.’

The attractiveness comes from offering superior risk-adjusted returns; predictable, inflation-linked cash flows; low-risk, uncorrelated investment; and the diversified core infrastructure assets, for which cash flows can be forecast with a low margin of error.

A case in point is Dorper wind farm, a 98 MW project located near Molteno in the Eastern Cape. Gaia deployed R501 million of the R550 million capital that was raised when it listed in November 2015 on the JSE’s Main Board as a special purpose acquisition company (SPAC). ‘After completing the acquisition of an effective, see-through economic interest of 25.2% of Dorper, Gaia transferred to the investment services sector of the JSE in January 2017,’ according to Lebina.

A second acquisition in September last year of Noblesfontein wind farm sweetens the pot. To secure a 20% effective interest in the 73.8 MW wind farm, located between the Northern Cape towns of Three Sisters and Victoria West, Gaia obtained funding of R188 million from RMB Investments and Advisory (RMBIA) through the issuance of preference shares to RMBIA.

Dorper and Noblesfontein, which were both part of the first round of the Renewable Energy Independent Power Producer Procurement [REIPPP] programme, have a 20-year power purchase agreement with Eskom that has a CPI-indexed tariff, she says. ‘Despite Eskom performance and market views on this state-owned entity and the REIPPP impacting on Gaia, our primary focus is the secondary infrastructure market, which is not dependent on whether new projects are developed. We recently secured an attractive R1.7 billion exclusive investment pipeline in the secondary market, despite increased competition for high-quality assets that have a direct impact on pricing for such assets.’

Company growth is being affected by delays in capital raising, which Lebina says has an effect on a secure exclusive investment pipeline. Gaia has an option to acquire minority interests in three solar assets through its investment in a SPAC, Gaia RE 1. Thus, the concerns are hopefully temporary, given that Gaia intends to play a crucial role in facilitating access to the projects that Ramaphosa suggested would be forthcoming, and especially those that are in support of the nation’s development goals, as envisaged in the NDP.

For its 2017 financial year, Gaia paid a dividend of 63.5 cents per share (R25 million) to its shareholders. ‘This was increased by inflation to return 66.9 cents per share – or R37 million – in the 2018 financial year. Our board’s aim is to pay a consistent and stable dividend linked at a minimum to inflation.’

Gaia undertakes a comprehensive evaluation of projects to assure its investors that, beyond its strong technical, engineering and management background, the infrastructure projects it presents are value-adding assets. ‘All opportunities are evaluated against the shareholder-approved investment policy/criteria. A disciplined investment process from deal initiation to closure is followed by Gaia’s externalised management company,’ says Lebina.

‘Identified investments are analysed in detail and all information is independently verified through thorough due diligence and various deal structure mechanisms, which are considered by an investment committee before being presented to the board of directors for a final decision.

‘Although infrastructure is a new asset class in South Africa, more insight is being shared with the market. We are confident that the equity capital market will recognise just how positive an impact this asset class can have on a portfolio.’

By Kerry Dimmer