African infrastructure is defined by a scarcity dynamic with no direct equivalent in developed markets, writes Pranav Khamar
African infrastructure has matured as an asset class. Long the domain of development banks, foundations and other impact-led investors, it has now shown its potential for institutional investors seeking uncorrelated returns from fundamentally resilient assets.
Africa’s structural demand for infrastructure, driven by economic growth, demographics, and abundant natural resources, creates unique opportunities. Major investments are required in energy networks, logistics, water systems, healthcare, and education facilities. These projects need patient and flexible private capital, since public funding and bank lending alone are insufficient.
To date, global allocators have played a very limited role in financing African infrastructure on the basis of unwarranted concerns over the risks involved. But for those looking to diversify away from crowded developed markets, Africa offers a blend of attractive return profiles, real asset exposure, robust underwriting standards and hard currency cashflows that can help mitigate risk concerns.
The prior experience of institutional infrastructure investors’ entry into other emerging markets such as CEE, Latin America, and South Asia shows how private capital can accelerate growth and resilience during economic emergence. In each region, the influx of private investment not only improved infrastructure but also strengthened economic stability and supported ongoing development.
Thank Darwin for better underwriting standards
What makes African infrastructure such a distinctive asset class is a scarcity dynamic that has no direct equivalent in developed markets. Sub-Saharan Africa is experiencing some of the fastest population growth in the world and urbanisation patterns that are reshaping entire economies, not to mention the rapid emergence of its middle class which is driving stronger consumer demand. Africa’s urban population is expected to double by 2050, so while enormous pressure is being placed on the infrastructure that serves it, this presents opportunities to achieve attractive risk-adjusted returns while also achieving positive social and environmental impacts. Set against the scale of that demand, the volume of investable capital chasing transactions remains comparatively thin.
The result is a Darwinian filter on deal quality. The projects that are reaching financial close in this environment have already had to navigate considerable structural and commercial scrutiny. In essence, only the fittest survive. The market rewards quality, with the deals that succeed typically managed by credible partners with rigorous operational and risk management frameworks.
Infrastructure default rates in Africa also compare favourably with emerging market and developed market peers. Data from Moody’s Analytics, covering 6,389 infrastructure projects globally between 1983 and 2022, revealed that Africa has the second-lowest default rates of any region worldwide – 2.7% versus 3.8% in Western Europe and 7.1% in North America.
Getting past perception barriers
Of all the barriers to scaling institutional capital into African infrastructure, perceived risk is the hardest for investors to overcome. It dominates allocator conversations, often beyond what the actual performance data justifies. Every transaction, regardless of the region, will carry some degree of risk, but what matters is the way it is understood, structured, and priced.
Allocators who look closely at the deal performance record find it considerably more robust than the general sentiment suggests, and the continued reluctance of others to do the same is exactly what keeps competition for quality deals low. Estimates suggest returns for African infrastructure sit in the 14-22% range, compared with around 10% in the US.
Questions around scale tend to follow a similar pattern. When viewed as a single allocation, Africa can appear too small to justify the effort for larger investors. But in practice, a strategy spanning multiple economies and combining sovereign and private sector exposures offers something quite different. The capital has to catch up.
Matching capital to context
The potential held in this diversification only truly works if the capital is aligned to the context it is entering. Across a continent comprised of 54 countries, each with different legal and regulatory frameworks and risk profiles, a one-size-fits-all approach to infrastructure investment will not work.
For instance, a sovereign-backed credit structure suited to Angola will look nothing like a private sector-led public-private partnership in Kenya, where the market for PPP transactions has matured considerably and the pipeline of well-structured opportunities reflects that maturity.
Capital can be deployed effectively, but it requires the ability to distinguish between different contexts and match the right funding structure to the right situation. Boots-on-the-ground expertise becomes essential here, as does the development of local relationships and the patience to understand that deal origination in this market often needs to take place face-to-face.
Combining resilience and double-digit growth
As developed markets underpin performance based on growth trends exposed to uncertainty such as the ‘AI bubble’ and interest rate shocks, African infrastructure operates on a different footing entirely.
In African infrastructure, defensive sectors such as utilities and transport often underpinned by contracted cashflows that provide sound baseline returns, offering a measure of stability even in volatile markets. This foundation co-exists with the potential for double-digit topline growth over the medium-to-long term, particularly in sectors where demand is expanding rapidly and assets are well-positioned to capture emerging opportunities. The interplay between secure, predictable revenues and strong growth prospects makes the investment case uniquely attractive.
With the realignment of supply chains pushing this momentum further, the demand for domestic logistics, energy, and connectivity infrastructure is not going anywhere. The argument for African infrastructure has not changed, but the cost of dismissing its validity and investment potential is certainly growing steeper.
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