This article was originally written by & published on Hedge News Africa
FUND FACTS
Futuregrowth Infrastructure & Development Bond Fund
Portfolio manager: Jason Lightfoot
Inception: January 1995
AUM: R14.8 billion
Current structure: pooled
Performance target: ALBI +1%
Open to investment: yes
Liquidity terms: one calendar month
Many South African investment managers already have a strong track record of supporting economic development, notes Futuregrowth’s Jason Lightfoot, and investors looking to spur economic revival in a Covid-hit world need not expect sub-par returns in this area.
Lightfoot is portfolio manager of the Futuregrowth Infrastructure & Development Bond Fund, a specialist yield-enhanced bond portfolio that is the flagship fund in Futuregrowth’s suite of developmental investments.
Launched in 1995, the fund aims to provide investors with a vehicle that facilitates infrastructural, social, environmental and economic development in southern Africa and delivers on a variety of social impact requirements such as job creation, affordable housing, access to services and healthcare to name a few.
The fund allows for up to 50% in unlisted private debt, with a mandated 20% in liquid assets, including bonds that form part of the All Bond Index as well as instruments with a maturity of less than one year. The fund has a small allocation to private equity also in the developmental space, invested via a standalone fund, resulting in good risk-adjusted alpha generation over time.
Its return target is to outperform the ALBI by 1% over rolling three-year periods, which is reflected in its track record. Over the past 20 years it has delivered a gross annualised 11.82% return, versus 10.16% from the ALBI, successfully navigating market stress including the financial crisis in 2008/2009, Nenegate in 2015 and the post Covid-19 fallout to date.
Lightfoot has been with Futuregrowth for 20 years, managing the fund for the past 12 years. The 33-member team has skills ranging across credit (listed and unlisted), dealing, and interest rates – adding value across the portfolio via specialised and complementary capabilities.
The fund can invest in a wide range of debt instruments including those issued by government, parastatals and corporates (limited to infrastructure and developmental outcomes), as well as securitised assets, targeting high returns through a combination of moderate credit concentration limits, active interest-rate risk management and active off-benchmark bets.
To retain adequate liquidity and flexibility, and in the course of managing new investments, asset maturities and fund flows, the fund usually maintains a high degree of liquid and/or non-developmental assets.
“Understandably there is a significant push from government to fund development initiatives given South Africa’s sub-par growth of recent years and the impact of the Covid crisis across the economy,” says Lightfoot. “We are encouraged by the fact that pension funds have already been doing this for the past 20 years by partnering with teams such as ours, which proves it can be done.”
One of the fund’s key features is geographical diversity, with investments held in nine provinces across South Africa, and 65% exposure to assets with a national footprint. It has exposure to over 134 issuers and 30 economic sectors.
Nearly 63% of the fund is invested in a combination of medium-to-high impact investments, with over 30% of investments in rural and peri-urban areas, focusing on tangible social and developmental impact aligned with the United Nations’ Sustainable Development Goals.
By sector, the fund currently has the biggest exposure to renewable energy, accounting for 17% market value exposure, having funded 29 different transactions which are typically regarded as hard infrastructure. This has become an increasingly important sector, particularly in context of the country’s constrained power supply, which usually serves as the backbone to spur economic development.
Futuregrowth sees ongoing opportunities across sectors off the back of government’s infrastructure drive, where assets present a good liability match for longer-term allocators.
The fund currently has exposure to 147 different transactions with an average tenure to maturity of 10 years.
In 2016 Futuregrowth, on behalf of clients, advanced a R35 million debt facility to Retail Capital, a merchant cash advance business that focuses on funding the South African SMME market and promoting job creation via transparent, fair and responsible processes. Over the past three years, this has grown to R115 million. It also bought 38.8% of the business in 2017, owning 28% as of 2020.
Since inception in 2011, Retail Capital has provided funding of over R3 billion to more than 22,000 SMMEs throughout the country – ranging from restaurants and retailers to medical practitioners and beauty spas.
The fund also invested in a R200 million debt facility to Huge Group in 2018, an entrepreneurial business that is skilled in delivering innovative products, services and know-how to SMMEs, by investing in telecommunications, innovation and technology.
Futuregrowth has also had a longstanding relationship with Transaction Capital and has been a strong funding supporter of the taxi finance business since 2006, a comprehensive financial, insurance and allied services offering to minibus taxi operators, which extends loans to SMEs at various stages of development. More recently, Futuregrowth was a key funder which facilitated the South African National Taxi Council (Santaco) to acquire a strategic stake in SA Taxi Holdings.
For Lightfoot, in the context of government’s infrastructure drive, the bankability of deals presents the biggest risk to investors from a pipeline perspective. “The funding gap is huge, but not unsurmountable. Many of the earmarked transactions are in the initial stages and government needs to work hard and provide adequate funding through Development Finance Institutions to ensure that these projects reach a stage where the private sector can play a role and provide long-term funding for deals with sound cash-flow profiles.”
The product is an open-ended fund, which investors can access via a pooled mechanism. It has a broad range of investors of around 57 different institutions. primarily in the form of pension and retirement funds.
Lightfoot notes that although the fund has suffered some short-term pain from recent revaluations off the back of a credit environment that remains a far cry from what it was pre-Covid, it is well positioned given a very healthy level of spread accrual from current investments.
“We are long-term investors, we don’t necessarily trade in and out of deals in the unlisted space. In fact, we’ve had some assets in the portfolio for as long as 18 years,” he says. “We’ve had a wide range of investors from the outset, supported by large asset allocators and consultants.
“Every transaction in the fund is assessed for the potential economic, financial and developmental impact it can have,” he says. “As our 20-year track record shows, there is a definite case to be made in developmental funding and these assets are extremely well suited to the retirement fund industry in a world of low returns.”
