MOBILIST – The Exit Mobilisation Opportunity in Africa

‘Exit-mobilisation’ refers to the process through which a public sector owned development finance institution (DFI) exits an investment by selling its holding to commercial investors. In this pioneering study, Eighteen East explores the opportunity for DFIs to mobilise capital from African and international private investors into listed product structures. The study assesses the feasibility of, and the hurdles to, the implementation of exit-mobilisation to investments made by DFIs in sub-Saharan Africa.

SPEED READ

• In this study, Eighteen East analyse the opportunity for public sector owned development finance institutions (DFIs) to mobilise private capital into African economies by selling (‘exiting’) their holdings to institutional investors.
• The study maps the existing landscape of DFI investment in sub-Saharan Africa, finding (USD) $45 billion in commitments. The mapping identifies the dominance of three multilateral DFIs and three African markets over others; of debt over equity; of Dollar- and Euro-denomination over local currency; and financial institutions, energy and extractives over other sectors.
• A deep-dive analysis of East African commitments finds that DFIs often participate in less risky investments than may be assumed. Leaving aside the issue of additionality, this finding suggests that DFI assets may be attractive to institutional investors.
• Eighteen East proceed by testing appetite amongst institutional investors in East Africa, South Africa, Nigeria, and the UK, finding diverse barriers and priorities.
• The study considers several potential instruments or product structures that could overcome these barriers and speak to investors’ priorities, facilitating exit-mobilisation at scale.
• Finally, the study considers the factors that determine DFIs’ willingness and ability to engage with exit-mobilisation as well as pathways to executing and scaling the strategy.
• The authors conclude by recommending specific policy streams on transparency, standardisation and DFI incentives; and efforts to enhance exit-mobilisation in partnership with local institutional investors and via local capital markets.

SUMMARY

‘Exit-mobilisation’ refers to the process through which a public sector owned development finance institution (DFI) exits an investment by selling its holding to commercial investors. In this pioneering study, Eighteen East explores the opportunity for DFIs to mobilise capital from African and international private investors into listed product structures. The study assesses the feasibility of, and the hurdles to, the implementation of exit-mobilisation to investments made by DFIs in sub-Saharan Africa.

The study starts by mapping the existing landscape of DFI investments in sub-Saharan Africa, offering a snapshot of the universe of holdings that could, in theory, be sold to commercial investors. Based on data from nine DFIs covering commitments worth USD $45 billion in the decade to end-2019, this mapping highlights the following key features:

• Three multilateral DFIs (IFC, AfDB, EIB) account for more than 65% of commitments across the nine institutions.
• More than 95% of commitments were made in currencies other than the domestic currency of the investee. US Dollars and Euro were predominant.
• Loans represented more than three-quarters of all commitments. Private equity funds account for two-thirds of all equity.
• Together, three countries ⁠— South Africa, Nigeria and Kenya ⁠— represent 42% of all direct DFI commitments across sub-Saharan Africa.
• Across sectors, Financial Institutions and Energy and Extractives represent more than 75% of direct loan commitments across sectors, including renewable and non-renewable energy generation.

Eighteen East’s analysis of the limited publicly available data on the performance of DFI investments in sub-Saharan Africa suggests a relatively narrow range on the debt side (5.60%-7.05% interest and related income) and, at best, mixed performance on the private equity side, with fund-level internal rates of return in the low single-digits and, in some cases, in negative territory.

Against this continental backdrop, the study offers a deep-dive analysis of (USD) $7.81 billion DFI direct debt and equity commitments in East Africa. Data on these commitments suggests a similar landscape to that of the sub-Saharan Africa region as a whole, including a predominance of debt and concentration in Financial Institutions and Infrastructure. Through detailed case studies, Eighteen East show that contrary to often-held perceptions, DFIs are substantially invested in relatively safe “contextually large, regulated, stock exchange listed financial institutions” in East Africa. The study also highlights a pioneering regional DFI, TDB Group, which has been an early mover on private capital mobilisation, including several landmark exits during the period under analysis.

Building on this analysis of the potential supply of DFI assets that could be sold to commercial investors, the study proceeds with findings from an investor engagement exercise to understand demand for such exposure. Eighteen East conducted investor outreach in East Africa, Nigeria, South Africa and the UK, offering perspectives from regional and international pension funds and insurance companies. Across the board, regional pension fund portfolios were deeply concentrated in government bonds and other fixed-income instruments, reflecting their “highly conservative” approach. Inherent risk aversion, regulatory restrictions, currency mismatch and shallow, underperforming corporate debt and equity markets all appeared to constrain prospects for the sale of DFI holdings to East African institutional investors (one possible exception was the rise of listed instruments offering infrastructure exposure). South Africa’s Public Investment Corporation (PIC) stands out amongst the country’s institutional investors for its size, social impact focus and experience co-investing with international DFIs across the continent. Engagement with the PIC suggests a potential appetite to buy DFI stakes through secondary transactions but a lack of meaningful appetite for such transactions from the DFIs.

Engagement with UK pension funds and insurance companies identified few regulatory or normative restrictions on African exposure; however, real and perceived underperformance of forays into the continent’s growth story weighed on appetite for future DFI exit-mobilisation. Most pension funds considered African exposure as part of their emerging and frontier market allocation or alternatives allocation but were unlikely to consider a separate allocation for the continent. For example, one local authority representative outlined a 5% allocation to emerging markets, within which 15% was earmarked for frontier markets, with Africa, in turn, receiving a small portion of this sub-allocation. Insurers had been more active in engaging with DFIs and with the African continent, though UK Prudential Regulatory Authority (PRA) capital adequacy rules presented a hurdle to emerging market investments in general and African investments in particular.

Noting that capital markets are far more proficient at replication than innovation, the study considers several potential instruments or structures that could facilitate exit-mobilisation. These instruments include closed-end investment companies (CEICs), for example, offering renewable energy exposure; special purpose acquisition companies (SPACs); true-sale and synthetic securitisations, including green collateralised loan obligations; and direct debt and equity issuances, including to exit holdings in the Financial Institutions sector.

Finally, the study considers the factors determining DFIs’ willingness and ability to engage with exit-mobilisation and pathways to execute and scale the strategy. Eighteen East notes that despite exit-mobilisation in theory being built into the development finance model, in reality, DFIs have developed a strong reliance on self-liquidating instruments and a propensity to hold investments to maturity. In this context, the study notes the critical importance of enhancing market infrastructure and engaging DFIs and peer initiatives to demonstrate the long-term, scalable benefits of exit-mobilisation in pursuit of the Sustainable Development Goals.

MOBILIST: The Exit Mobilisation Opportunity in Africa concludes by discussing policy implications, including for the UK’s mobilisation agenda. The study acknowledges the scale and complexity of the challenge facing MOBILIST. It highlights the importance of clear, consistent messaging to the DFIs and to the market on support for the mobilisation agenda in general and for exit-mobilisation in particular, and the positive value that such a strategy can create on all sides.

Eighteen East recommend specific policy streams relating to (i) transparency, including data pertaining to DFI investments; (ii) standardisation, including legal documentation and instrumentation; and (iii) incentivisation for DFI teams and management, private sector partners, intermediaries and capital market regulators. The study closes with a call to develop local and regional capital markets on the African continent. African institutional investors have different perceptions of risk and a higher demand for their continent’s growth than foreign investors. In this context, local African capital markets may provide a path of least resistance in the short-term and an environment in which MOBILIST’s resources could have outsize impact: