GAIA GROUP: Positive Impact Fuels Gaia Growth

To solve the big problems, there is truly only one solution – money. Whether it’s infrastructure in South Africa, healthcare across the continent, connectivity in rural regions, or energy provision that keeps the lights on, consistently; when money moves solutions begin to appear.

But money from where? And who? And how is it deployed? Should governments be involved? There are many issues to consider when searching for money to solve structural issues while generating returns. Ultimately, private capital must be involved, and to attract that you must have stability, security, and realistic potential around returns.

The experts around generating impact-based funds, specialist Real Estate Investment Trusts (REIT), and listed infrastructure vehicles in South Africa is Gaia. Founded in Cape Town in 2012 to attract long-term investor capital to projects in sub-Saharan Africa, Gaia has developed a reputation for excellence in the industry. It’s ability to demonstrate strong fundamentals, a transparent model, and – importantly – robust returns make it a sector specialist with skills that few others can match.

The headline projects at Gaia just now are the Gaia Fibonacci Fibre REIT (GFFR), the Gaia Renewables REIT (GRR) and the expected first close of the Gaia Africa Climate Fund (GACF) in 2024. GFFR has raised a total of c.R270m to date and will be looking to list C Preference Shares early in 2024 for a total deployment of R300m. In August 2023, GRR hit the Cape Town Stock Exchange (CTSE) as its first ever impact board listing when its first tranche of shares was listed, valued at R151.5 million. GRR will be closing out the initial raise at R500m by end of Feb-24. GACF will finalise first close early in 2024 looking to kickstart the renewable energy ecosystem in Sub-Sahara Africa.

These vehicles are aimed at providing real impact where South Africa and the African continent needs it most.

“We believe we can make a solid impact in South Africa and that is the nice thing about the Gaia team – we believe in the impact focus and continuously looking to pioneer best in class in South Africa,” says COO, Denzil Kennon.

THE LITTLE EDGE

Appointed in 2021 to assist in the structure and implementation behind these vehicles, Kennon is a seasoned pro in the investment space. He is excited about building opportunities within a brand that is recognised for excellence.

“The renewable space in South Africa is highly competitive. What we look to do at Gaia, is focus on solutions that give us that little edge,” he explains. “The REIT in the fibre space was the first of its kind in South Africa or Africa. Gaia Renewables REIT was the same – the first renewables REIT in South Africa. It’s about finding solutions that give investors that extra percent or two in their returns, making it that little bit more attractive. The end goal is to catalyse funding into the infrastructure space in South Africa. It helps to even out a lot of difficulties that SA has and so we want to drive private capital into the infrastructure space to alleviate the burden that government suffers with, while speeding up the entire process.”

To date, the result of investment into the fibre REIT is around 30,000 homes connected with a concentration in Gauteng and the Western Cape following the acquisition of 130 fibre networks. Focused on the lower LSM markets, the Gaia team sees major scope to increase impact here considering that much of the country remains underserved and searching for low-cost, high-volume data connectivity.

“We do love our REITs,” smiles Kennon. “My role is to create the platforms so that our deal team can grow the platforms. The fibre REIT has around R300 million in due diligence and when that gets approved we match the investment with specific investment projects. The moment the money comes in, we have the pipeline to deploy it immediately.”

The same goes, he says, for the renewables REIT where Gaia has an enormous amount of money working through the due diligence checks before being readied for deployment on vital energy products in South Africa.

“Once the REIT has been listed with the required decision-making structures in place, the team focus turns to fundraising and deployment into quality assets. If those structures are well implemented, we expect the monitoring to align with the requisite governance structures to create a healthy ecosystem for the market. In the shorter term, we want to focus on consolidation and grow that out through the rest of this year.”

Denzil Kennon, COO

INTEREST RATE CHALLENGE

The challenges in mobilising money for these projects are obvious and common. Finding the correct amount of capital, moving the money from one location to another, ensuring all legalities are in place, and doing so transparently and sustainably is no easy feat. But Gaia has experience, and its team is nimble when comes to problem solving.

“Interest rate hikes and inflation have been big challenges in South Africa,” Kennon details.  “When we put a product to market it is generally inflation linked. Across the board, we aim for a targeted return of CPI + 7. When you have an interest rate that keeps climbing, you start seeing bonds and seemingly less risky investments competing with your solutions. When we look at fund allocators and where capital is going, it is easier to say we should give up two or three percent to get close to the near risk-free rate.”

But when interest rates stabilise, moving down from the current – which inevitably they will – Gaia’s products continue to provide a healthy risk adjusted return with an important space in any portfolio. A reduction in rates will also encourage those on the hunt for traditional ‘safety’ with investments, and looking at returns guaranteed by bonds.

“The economic environment in SA remains tough with load shedding etc and that is a marketing tool in itself for the business we have,” Kennon explains. “It is so easy to pitch an embedded solar solution to businesses battling with an unreliable electricity supply . The bonus is that we are providing it through the lens of impact by providing clean energy as well as on a cost saving basis for the business itself. We do find that, especially in our fibre REIT, that although we try to be business-to-business, we are affected by the end user. The end user in South Africa is struggling as inflation and interest rate hikes, driven by unrest around the world, keep placing pressure on the spend on the necessary utilities. We have responded to the market directly and we are in touch with what the problems are while reiterating that it is not a long-term problem in SA. We need to be part of the solution.”

In the renewable energy space, Gaia has a model that is tried and tested, and one which gets results in a challenging space. Already, the fund has a holding in the Tsitsikamma community wind farm in the Eastern Cape and Kennon sees obvious growth to come in this industry.

“We want to provide money to the development cycle so that more and more renewable energy plants are built,” he says. “We are happy to acquire an asset on a secondary market, give our investors a return well adjusted for risk, and churn that money so we can free up the funding for developers to keep building plants. That is our specialty and we are strong in that market. We fuel developers and EPC contractors to continue with that cycle.”

IMPACT FOCUS

One of the core elements in the Gaia investment proposition is provision of ‘positive, sustainable impact to Africa and its people’ alongside all of the other pillars expected of a specialist asset manager. Part of the company’s commitment to ESG and impact is a mission to drive positive change for the planet and its people by mobilising investments into impactful catalytic and systemic solutions.

For Kennon, an industrial engineering (PhD) who has worked across various financial institutions starting out at Allan Gray, the Gaia focus on impact – doing so at international scale and quality – -is the differentiator and delivers what other fund managers simply cannot.     

“That has been Gaia’s big focus this year,” he says. “We want to be best in breed.”

Gaia’s Africa Climate Fund has been selected as one of just five funds by the International Climate Finance Accelerator (ICFA) in Luxembourg because of the evidence that Gaia can invest in operational infrastructure projects with stable cash flows allowing project developers to recycle their capital and develop new projects for the benefit of the continent and its people. The task here fits the vision.

“The climate accelerator that we are part of is helping us to bring the fund to first close early in 2024. That has enabled us to be at the forefront of new standards around impact investments. We are fortunate to have partners in the UK, Luxembourg, and Norway who can guide us. Through this collaboration, we were able to develop the right structures and list the renewables REIT on the impact board of the CTSE – the first company to do so. That was exciting and the idea that, alongside good returns financially, we can give real positive impact is really valuable.”

In 2024, Gaia will look to attract more money from the global north to help drive climate positive projects on the continent. Africa is home to around 17% of the world’s population, with seven of the world’s top 20 fastest growing economies, and enormous renewable energy potential, but less than 2% of global renewable energy investment. Bringing in fresh investment is essential because if Africa is left with no choice but to power its 600 million who do not have access to electricity with fossil fuels then the world’s targets will be wrecked. The Gaia Africa Climate Fund aims for US$200 million that can be deployed on sustainable and renewable energy infrastructure primarily, with a secondary focus on water and sewage projects.

“Gaia will be looking for ways to have private capital meet the opportunities in Africa. The participation and success with ICFA has provided a strong position from which to match those needs between the EU and Africa, but we also need to provide the opportunity for the northern American counterparts. How do we get those interactions in place?” Kennon questions. “They need a vehicle that gives them comfort to encroach into Africa, trust is critical here. We are the team to do it. We have the background, we have the track record, and we have a history of innovative solutions,” he says, adding that Gaia has been an industry leader, coming up with many firsts for the past 11 years.

Fortunately for the team at Gaia, the problem to solve is attracting money and not about hunting for places and projects to utilise it for minimal return. The opportunity provided by Africa is real.

“In fact, it is enormous, and that is why we are so excited,” says Kennon. “We are so far from the saturated markets and all we need to do find the capital to fill these spaces. We are also looking ways that can enable other asset managers and fund managers to do so in SA.”  

Finding the meaningful money, keeping it safe while being transparent, utilising it for change in Africa, and recycling it for wider impact is not easy. Through the various REITs and now the Gaia Africa Climate Fund, Gaia continues to show that it is committed to a cause bigger than itself. The group is talented and knowledgeable, and the proof of quality is in the returns.

“I would be very surprised if any investment or asset manager in South Africa said things went exactly to plan. South Africa has its unique challenges, but that is what sets us apart from the others – we are a team of highly focussed problem-solving individuals.,” concludes Kennon.