Private capital can get post-Covid economy up and running
The abundant resource of multitrillions of dollars is waiting to invest in viable projects
Over the coming months, we are going to emerge from global lockdown into an economy over which the Covid-19 virus will cast its long shadow. But does that have to be the end of the story?
There is another shadow that could go a long way towards neutralising the worst effects of this malignant virus on the global economy. A shadow cast by a colossal, multitrillion-dollar mountain of unused private capital that stands ready, willing and able to be deployed into construction, infrastructure, energy and other projects across Africa and elsewhere.
To find the first stirrings of the tectonic capital market upheavals that bought us to this point we need to look back to the OECD Global Pensions Report 2006. In this unlikely setting we find the first mention of a “financial meltdown” from a recognised intergovernmental organisation.
It analysed how family offices, hedge and private equity funds had become so awash with liquidity that it was proving impossible to generate any meaningful returns for the private capital they were trying to deploy into the market. A trend that had been under way, according to that Organisation for Economic Co-operation and Development report, since 2005.
Business Day readers will recall the fleeting appearance of the “shadow banking” sector in the wake of the 2008 crash. This was a term coined by the global banking establishment for a phenomenon they were struggling to get to grips with. The rapid and (to them) inexplicable ascendancy of the entire gamut of private capital institutions. But look now at any “private capital” data and you will find numbers running well into the multitrillions of dollars, conveying the sheer magnitude of the private wealth-powered “shadow banking” sector.
According to the Wealth-X, The World Ultra-Wealth report 2019, there were 353,550 ultra-rich individuals with a projected total wealth of $43-trillion by 2023. The Economist reported that, at a conference for such individuals and their family offices in Dubai in December 2018, there was over $2-trillion in the room.
Preqin, the font of all wisdom in the alternative capital sector, has 100,000 subscribers across every conceivable type of private capital entity. These are numbers that cannot be ignored and prove that, after a decade of growth and consolidation, the “shadow banking” sector has come to overshadow traditional banks. Irony lives.
This is most certainly true of project finance, a multitrillion-dollar market in its own right and now dominated by private capital institutions. Due to its unstructured nature it is a market in name only. But, whereas municipalities and corporates can take their “A” (or better) credit agency rated proposal to the institutional capital markets where their funding is guaranteed, the story is a whole lot different for those without that rating.
These are the overwhelming majority, thousands of them ranging from local $20m senior living developments through $200m or $500m renewable energy plants to $1bn-plus transport and other infrastructure projects. They are entering a fragmented and frustrating market of, again, thousands of private capital sources ranging across hedge funds, private equity and debt funds, mandated lenders, asset managers, wealth managers, private banks, multi- and single-family offices and more besides.
Though fragmented, they comprise a vast and abundant resource of multitrillions of dollars, known as “dry powder”, waiting to invest in viable projects.
Few African business leaders and governments with projects seeking funding are aware of these capital market developments. And perhaps even fewer appreciate that genuine project finance is “non-recourse”. Meaning that, provided there is a contracted and credible buyer for whatever the built project is going to produce, the project company, its shareholders and board carry no financial liability whatsoever.
This could be a power purchase agreement for a renewable energy plant, an operations and management agreement with a hotel or hospital operator, or any one of dozens of other “offtake” options.
Alternatively, an independent and credible feasibility study will sometimes be sufficient to secure finance for a transport, hospital, social housing or similar infrastructure project. This directly reflects how the capital markets work with credit agency-rated borrowers, where they lend against the rating and not the project sponsor or principals.
For private lenders, the off-taker and all those contractors involved in the project have to meet acceptable and under-
writable standards of financial stability and track record. Also, all documentation including permits, permissions, site access, connectivity and many other statutory and other requirements have to be documented, organised and presented. But after all that, and after all the necessary due diligence, financing can be directed into the project through its special purpose vehicle.
Navigating what is right now a market in its infancy, for both the buy and sell sides, remains a challenge. The majority of private financiers like to keep a low profile, working through their trusted intermediaries. Finance raisers are left to seek these people out while avoiding joker-brokers, advance fee scams and other hazards.
However, there are standards, protocols and the first hint of structure emerging — particularly as the more seasoned intermediaries start identifying each other and deploying the opportunities through their networks to reach more financiers. Baby steps towards overcoming the current market fragmentation and releasing as much as possible of those trillions of dollars of dry powder.
So, there is hope for the post-Covid economy yet. Indeed, this abundant private capital resource could be unleashed to get many hundreds of frustrated renewable energy, agri, infrastructure and other projects throughout Africa off the starting blocks.
Beyond any shadow of doubt we have to pick up this ball, and run with it.
• Rose, now semi-retired after a career of more than 20 years as a project finance intermediary and direct financier, founded the Insurance Wrapped Project Finance programme. He is author of The Raising Project Finance Handbook