Africa carries a risk premium far greater than its actual risk. Fifty years of development-lending and World Bank data show the probability of loss on African infrastructure projects is on par with, or lower than, developed markets. My guest has spent a decade building a fund designed around that mispricing.
Andrew Johnstone is the Co-Founder and CEO of Climate Fund Managers (CFM), a blended-finance platform managing just over $3 billion across renewable energy, water and oceans, green hydrogen, and — most recently — private credit. He was a civil engineer who started out designing roads in KwaZulu-Natal before he ever financed one.
Andrew was born in Johannesburg to British parents who emigrated to South Africa after World War II. His father was a mechanical engineer on the mines, and the family moved to Pietermaritzburg when Andrew was 18 months old. He followed his father into engineering — civil, "just to really break the mold" — earning a BSc in Civil Engineering from the University of Natal on a bursary from the Natal Roads Department, where he spent his university vacations surveying, setting out roads and fixing graders. After national service as a lieutenant in the South African Air Force and a stretch backpacking, he moved to the UK, completed an MBA in Engineering Management and Finance at City University London, and pivoted from the technical side toward finance. A year in Brazil implementing toll road concessions around Rio de Janeiro followed, then a return to South Africa in 1997 — the year the country won the Rugby World Cup — to work for the construction company Group Five.
In 2000, he joined Macquarie as one of two people building an infrastructure team in South Africa. In partnership with Old Mutual, they took over management of the South African Infrastructure Fund — the first African infrastructure fund, established in 1996 — from Standard Bank. That business became African Infrastructure Investment Managers (AIIM), where Andrew rose to CEO while also serving as Chairman of Macquarie Africa. Over roughly 15 years and seven funds, he watched infrastructure evolve from what he calls "a very boring sector" nobody cared about into an institutional asset class. His lasting lesson from that chapter: institutions matter, and partnerships have a lifespan — you need the skill to curate, manage and eventually unwind them.
By 2015, at the peak of the platform's success and about to launch fund number eight, he concluded the model wasn't winning. Demand for infrastructure was outstripping delivery, and the deficiency wasn't money, intent or opportunity — it was the method. Project finance assumes risk can be defined, parameterised and allocated at a fixed moment in time. In practice, on a toll road in Nigeria, the list is never complete, the parameters never hold, and the risks keep changing. He had presided over projects that took eight years to reach financial close. So he resigned, told his wife he never wanted to be a fund manager or a CEO again — and roughly 18 months later, through Climate Policy Initiative's Innovation Lab for Climate Finance, co-founded CFM as a joint venture between the Dutch development bank FMO and Sanlam InfraWorks of South Africa's Sanlam Group.
Much of our conversation is about the architecture that came out of that "petri dish." CFM's whole-of-life model splits a project's life into three funds — development, construction and operations — each with capital comfortable at that stage of risk. The static thing is the project; the money moves in and out. Construction is financed with equity because it is faster, and the cost of that equity is brought down by blending at the fund level: a 20% first-loss tranche, a 40% commercial tranche, and a 40% senior tranche, distributed by waterfall rather than pro rata. The project company sees one check of 100. Climate Investor One has developed more than 70 projects, built 16, refinanced seven or eight, and completed three exits.
We also get into the debt-for-nature swap around the Galápagos Islands, where CFM bought Ecuadorian bonds trading at distressed yields — the market wanted 19%, CFM only needed 10% — and split the difference between fiscal relief for the government and conservation funding that expanded the marine protected area by 50%, mobilising $90 million of commercial capital into a conservation outcome. And we discuss the GAIA Climate Loan Fund, CFM's move into private credit for sovereign and sub-sovereign borrowers alongside MUFG, FinDev Canada and the Green Climate Fund, designed to lend in local currency, over longer tenors, without the sovereign counter-guarantee that multilateral lenders typically require.
Andrew is direct about what the industry gets wrong. He argues the real constraint in Africa is absorption rate, not asset performance — and he challenges the premise that credit enhancement is meant to make the future less risky: "Tomorrow isn't less risky than today. It never will be." He says he has yet to sit in an investment or credit committee that asks whether it is taking enough risk.
I also put the hardest question to him directly: if these deals can't happen without public money sitting in first loss, in what sense are the returns commercial — and why the private equity fee structure on top? His answer is that the blend absorbs risk rather than enhancing returns, that the waterfall means there is no scenario in which the manager earns carry while public capital loses money, and that CFM and its shareholders are collectively among the largest investors in their own funds.
What stayed with me is his candour about scale. CFM manages just over $3 billion, against a global climate funding requirement he puts at $5 trillion a year. "Yes, it's an interesting and funky model," he says, "but three billion doesn't really cut it." The answer, he believes, lies in standardisation — because with standardisation comes replication, and with replication comes scale.
Listen Next: https://www.buzzsprout.com/2014049/episodes/19365985
Discover More from SRI360°:
Chapters:
00:00:00 Cold open
00:02:07 Episode preview: meet Andrew Johnstone
00:03:11 Welcome: when COVID hit the construction sites
00:03:51 A continuity plan that stopped at one week
00:07:21 What standing on site teaches a CEO
00:09:18 Every assumption is wrong: risk tolerance and time
00:10:38 Growing up in South Africa
00:12:46 Roads department, Air Force, MBA, Brazil
00:14:57 Joining Macquarie and Africa's first infrastructure fund
00:17:13 Macquarie and Old Mutual: an unlikely partnership
00:19:50 Why institutions and partnerships matter
00:22:17 Walking away in 2015
00:25:43 The Paris Agreement and the Innovation Lab
00:28:13 Frustrated project financiers, liberated blended financiers
00:32:55 First loss: shock absorbers for risky territory
00:35:45 CFM today: from renewables to Gaia private credit
00:42:08 135 people, four hubs, $3B AUM
00:43:52 Pace, impact and profit
00:45:54 The whole-of-life model: three funds, three houses
00:51:41 20/40/40: how the capital stack pays out
00:56:25 Why $3B isn't enough: turning 3 into 30
00:58:28 What makes a project bankable, and what kills it
01:01:35 Africa's risk premium vs. the real risk
01:04:33 Are emerging market default rates really lower?
01:06:08 The OECD's "cottage industry" verdict
01:07:45 Why blended finance hasn't standardized
01:09:43 Adaptation and the Galapagos debt-for-nature swap
01:13:33 Gaia: lending to cities and governments
01:18:19 The exit problem and bridge to bond
01:23:03 Shrinking aid budgets and the return of infrastructure
01:25:40 The fee question: are these returns really commercial?
01:31:18 Who takes the risk, who gets the carry?
01:34:01 The next ten years: heat, energy, water
01:36:03 The weapon is money
01:36:34 Rapid fire: the missing cost of carbon
01:38:15 What he wishes he'd known in 2015
01:39:20 The Thailand project that should have died sooner
01:40:22 The investment that beat expectations
01:41:19 Where to start a climate finance career
01:41:54 Wrap-up
01:42:17 Where to find Andrew and CFM
01:43:16 Outro
