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Infrastructure funds acquire 66% interest in Kelvin Power

INDEX
28 Aug  2007

In a move that represents a substantial investment in South Africa's power generation capacity, three infrastructure funds managed by Old Mutual Investment Group South Africa (OMIGSA)'s Alternative Investments boutique - the IDEAS Fund, the African Infrastructure Fund and the Kagiso Empowerment Infrastructure Fund (KEIF) - have concluded a transaction to acquire a total 66% equity interest in Kelvin Power.

The IDEAS Fund is offered by Setsing Financial Services, a company jointly owned by Unity Incorporation and OIMGSA. The latter two funds are jointly managed by OMIGSA and Macquarie under their African Infrastructure Investment Managers (AIIM) joint venture, while KEIF is also managed by Kagiso Trust Investments.

Kelvin Power is a 600MW coal-fired power plant located near Kempton Park that provides City Power with electricity, currently meeting about 20% of the Johannesburg metropolitan area's total requirements. Previously owned by the City of Johannesburg, it was privatised in 2000. It is o­ne of o­nly a handful of privately owned power plants in South Africa that also has a long-term Power Purchase Agreement in place.

According to Makole Maponya, portfolio manager of OMIGSA’s IDEAS Fund, the three funds have led a consortium that has acquired a total 95% stake in Kelvin Power for an undisclosed amount. The other shareholders are Aldwych International (the operator), black empowerment group J&J Infrastructure Holdings (Pty) Ltd, and Netherlands Development Finance Company (FMO). Global African Power (Pty) Ltd, Kelvin’s existing black economic empowerment company, retains a 5% stake. The new shareholding structure will boost Kelvin’s BEE ownership to over 20%.

Funding represents important investment in SA's infrastrucutre

“The funding represents an important investment by Old Mutual in South Africa’s infrastructure needs,” says Maponya. “As is well known, the country is facing an electricity shortage over the medium-term, and the funds will be used by Kelvin Power for key capital investment necessary to continue to improve its electricity output, as well as to repay some existing debt.

“In fact, since Aldwych’s transition team started work in April this year, the plant’s electricity output has already improved significantly. We are confident that this improvement will continue, and that the plant will continue to play an invaluable role in the country’s infrastructure in the years to come.”

Launched in 1999, OMIGSA’s IDEAS Fund is South Africa’s oldest in terms of developmental investing and focuses predominantly on infrastructural and developmental assets that make a significant contribution to growth and empowerment. Its investment in Kelvin Power brings its total funds under management to approximately R1.8bn, and further diversifies the Fund’s asset base, which includes toll roads, private prisons, affordable housing and railroads.

The IDEAS Fund has produced robust and consistent returns, recording a return of 17% since inception, while over three years it has returned 20.2% (annualised to end-June 2007, all time-weighted and excluding charges – Source: OMIGSA). It has not recorded any period of negative returns in its history.

“While we aim for a 65% fund allocation in equities, we also invest across bonds, property and cash,” elaborates Maponya. “Specific investments currently include major projects such as: the new Limpopo bridge and railway between Beitbridge and Bulawayo; the N3 toll road concession; the Matola Gas Company supplying industries in Maputo; the Bakwena Platinum Corridor toll road concession; and second network operator Neotel, amongst others.

“The IDEAS Fund’s success to date, and indeed that of the AIIM and Kagiso Funds, demonstrates how OMIGSA and other asset managers can provide private funding for important public development needs, shouldering risk and earning commensurate returns,” she concludes.

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