Infrastructure gains credibility as an asset class in Nigeria

Nigeria

Rachel Moré-Oshodi, CEO of ARM-Harith, talks to The Energy Year about the factors that have helped generate interest in infrastructure as an alternative asset class in Nigeria and the role infrastructure funds can play in economic development.

ARM-Harith is an investment firm that develops and invests in energy, logistics and infrastructure projects.

• As inflation erodes returns from traditional assets, institutional investors in Nigeria are paying closer attention to infrastructure as a source of long-term returns.
• Given the large infrastructure gaps that have emerged after years of population growth in Nigeria, the case for infrastructure investments is clear, and the next waves of development are expected to increasingly rely on domestic capital.
• Power investments in Nigeria are shifting towards diversified, portfolio-based models. Rather than backing single projects, investors are looking for pooled infrastructure platforms that spread risk across assets and markets.

How has the appeal of infrastructure as an asset class been evolving among institutional investors in Nigeria, and what are the main causes?
When we launched ARM-Harith more than 10 years ago, our primary goal was to mobilise domestic capital and channel it into Nigerian infrastructure projects. Back then, domestic institutional investors didn’t consider infrastructure equity an investible asset class due to risk and regulatory considerations. We were the first to structure infrastructure equity investments in a way that made it possible for Nigerian pension funds to participate in the most critical part of the capital stack, and the traction since then has been remarkable.
In Nigeria’s macroeconomic context, infrastructure assets can be a natural hedge against inflation. They not only preserve capital but also have the potential to generate strong returns, as long as the underlying projects are structured properly. Historically, infrastructure in Africa has been developed primarily with foreign capital, mainly from DFIs [development finance institutions]. Local investors stayed out for various reasons, including the inability to provide long-term local capital at reasonable rates and the fact that the space was fairly new and relatively risky for them to understand and get comfortable with, especially compared to high-yield government securities.
However, inflation changed the game, and as real returns turned negative, domestic savers were forced to look for alternatives. Real estate was the obvious backup plan, but that market has become illiquid and opaque – the dynamics in Nigeria’s real estate sector today defy the basic logic of supply and demand.
Given Nigeria’s growing population, the latent demand for infrastructure is undeniable. You can’t have almost 30 years of demographic growth and flat infrastructure development – the gap is glaring, and the case for investing is clear. Regulators have stepped up efforts to encourage pension funds and other institutional investors to allocate more capital to alternative investments, especially infrastructure.

What role does the power sector play within your investment strategies?
We’ve developed a platform that allows us to pool capital and invest it across a diversified portfolio of infrastructure assets, mitigating risk for investors. Power has been a big part of that. Our approach is to aggregate investments. We don’t want pension funds investing on a project-by-project basis. Instead, we ask them to trust us to construct a risk-adjusted portfolio that meets their return expectations.
Our largest power project in Nigeria is the Azura-Edo IPP, a 461-MW gas plant that accounts for about 10% of the total on-grid power supply. It’s arguably one of the best-performing assets in Nigeria today. In Ghana, we financed Twin City Energy, a 200-MW combined-cycle plant that is also a critical asset for the energy mix. We also have several mid-size assets of about 30 MW that provide embedded power to commercial and industrial users, such as data centres, which cannot tolerate even a second of downtime.
We’ve also ventured into mini-grids, which traditionally aren’t a natural fit for asset managers like us due to their much smaller sizes. The legal, development and advisory costs are the same whether you’re doing a 1-MW or 100-MW project. However, instead of walking away from the segment, we created an aggregation company to bundle mini-grid projects in a way that allows us to build scale and derive value while supporting underserved communities.

What is your strategy for growing your business outside Nigeria?
Our Fund II, for which we are targeting to raise USD 200 million, is pan-African. We’re still very active in West Africa but are now adding countries in the Francophone part of West Africa, such as Senegal and Côte d’Ivoire, as well as looking further afield in Eastern and Southern Africa.
This expansion is not just about chasing good projects – although that’s obviously important – it’s also about diversifying risks. Different regions offer different regulatory and macroeconomic environments, and by spreading our portfolio across them, we offset country-specific risks.

What are your long-term goals for ARM-Harith?
The ultimate goal is to turn infrastructure into a recognised asset class among institutional investors in Africa. That will require a shift in how pension funds think about investing, as well as building a robust pipeline and knowledge base to make infrastructure an allocation decision on par with what we see today with fixed income or real estate.
We must remember that the pension industry in Nigeria is only about 20 years old. There’s caution, and rightly so, given that we are dealing with people’s retirement savings. That’s why we’ve worked to create structures that address their pain points and de-risk investments. DFIs have been invaluable partners in that regard, providing catalytic capital that either absorbs first losses or allows us to offer early yields during the construction period. This shortens the time between investment and return, which is critical for pension fund managers, especially given the longer project development cycles in our region.
We’re essentially headed in the direction that other countries chose to follow decades ago. Pension capital helped build infrastructure in the UK, Australia and Canada, with governments initially providing guarantees. We don’t have that luxury in Africa, so we’ve had to innovate, but with capacity building and a consistent track record, we’ll reach a point where infrastructure becomes a mainstream investment. When that happens, domestic savings will finally start driving the outcomes our economies need.

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