Global Infrastructure Partners’ $5 billion record-setting acquisition of Equis Energy; GIC and Macquarie Capital’s $1.3 billion joint investment in a geothermal power company in the Philippines; EQT Infrastructure and Temasek’s recent partnership to invest in the region – all these events seem to be telling us one thing: that Asia has well and truly arrived as an investment destination.
“We are now looking to Asia, a region which presents compelling future opportunities for a firm like EQT also in the infrastructure space,” Lennart Blecher, head of EQT Real Assets and deputy managing partner at the firm, said at the time of the Temasek announcement, as he geared up to navigate opportunities in Southeast Asia, India, Korea, Japan, Australia and New Zealand.
“As returns are increasingly compressed in mature markets like Western Europe and North America, many global fund managers are shifting up the risk curve from traditionally core-focused strategies to core-plus and value-added strategies and thus opportunities in Asia become interesting from a risk-return perspective,” comments Michael Henningsen, a partner at placement agent First Avenue. “It’s a logical move.”
While most global institutional capital remains committed to OECD strategies, some investors are making their first moves in emerging markets. A recent Global Infrastructure Hub survey showed that 37.5 percent of 186 global investors – representing $7 trillion of assets under management – are now active in emerging markets, with 82 percent looking to invest more in them.
Fund managers are not the only ones heading East – you can also find the same movement among some of the most experienced direct investors in the world.
In October, OMERS said it would join its Canadian peers in tapping the potential of emerging Asian countries via a proposed new office in Singapore, to be opened next January. It said the hub is positioned to help make direct investment and cultivate new investment partners in the pan-Asia region.
PSP Investments followed suit by announcing its plan to open a Hong Kong office soon, as it allocates $3 billion to Asian infrastructure over the next five years. With its latest acquisition of Equis Energy, together with GIP, the Canadian pension has committed $1.4 billion to the region so far.
CPPIB has established a presence in Hong Kong and Mumbai, while CDPQ runs its Asia-Pacific hub out of Singapore, in addition to having offices in Shanghai and Sydney. OTPP, another Canadian heavyweight, opened its Hong Kong office in 2013.
Richard Lee, senior managing director of infrastructure equity at Manulife Capital, said at Infrastructure Investor’s recent Hong Kong Summit that his firm foresees double-digit growth in Asia, while North America and Western Europe are already too mature to grow any further. With 93 percent of its infrastructure portfolio in North America, the Canadian insurer has gained some exposure to Asian infrastructure through its Hong Kong unit and looks to invest more, as the firm’s asset pool grows in the continent.
For investors that don’t have a presence in the region, Asia-focused funds are an option. In August, AIMCo made a cornerstone commitment of $300 million to Macquarie’s second Asia Infrastructure Fund as its inaugural commitment to Asian infrastructure, for example.
While Western fund managers and experienced institutional investors are eyeing opportunities in the world’s fastest-growing region, domestic capital is not staying put.
Hong Kong-based insurance company FWD Group, for example, is ready to ramp up its infrastructure exposure and is open to making investments across the capital stack. “We are familiar with the Asian jurisdictions and we have business here. This is our backyard,” Paul Carrett, chief investment officer of the $24.4 billion Asian insurer, told us in a recent interview. “If we find managers with compelling stories and access to Asian infrastructure, including greenfield opportunities, I would certainly listen to that.”
“Lots of Asian LPs do look at their domestic markets actually, but mature markets in Asia, such as Japan and Korea, oftentimes do not provide sufficient opportunities,” says Henningsen. “When these investors, particularly the North Asians, go beyond their home market for diversification opportunities, OECD strategies remain highly sought after.”
He notes that, being new to the asset class, Asian investors often need more time to develop their own investment programme by starting with OECD strategies. Henningsen adds it can take them longer to respond to fundraising period compared with their peers in the US and Europe.
Therefore, it is also not surprising to see Asian LPs setting up global offices in a bid to get closer to opportunities and their investment partners. For example, in May, China Investment Corporation set up its New York office, followed by Korea Investment Corporation opening an outpost in Singapore this September. Korea’s biggest pension fund, the National Pension Service, also expanded its in-house team across three overseas offices over the past year.
Last year, we wrote that the march of North Asian LPs was in full swing and much the same can be said this year, as they look for opportunities in the West and in their backyard. The difference in 2017 (and 2018) is that they are bound to encounter a steady stream of Eastbound Western pilgrims along the way.
Swimming against the upstream
Despite the enthusiasm from Western investors and some strong economic fundamentals, emerging Asia is not an easy market to access, partly due to underdeveloped regulatory frameworks and partly because of a lack of bankable projects.
With that in mind, the Asian Development Bank has been working with local governments to prepare projects for private sector involvement with better structured deals and streamlined procurement. “Every government is talking about PPPs, but the level of commitment and sophistication of these Asian governments varies,” Michael Barrow, who leads Asian Development Bank’s private sector operations department, told attendees at our recent Hong Kong Summit. “Upstream work is a big challenge.”
In the Asian multilateral’s most recent research, infrastructure needs in developing Asia and the Pacific stand at more than $26 trillion, or $1.7 trillion a year, through 2030 to support growth, mitigate climate change and eradicate poverty.
Still, despite these challenges, Barrow pointed out that Asia also suffers from mismatched investor perceptions. “The biggest risk in Asia is the perceived risks, rather than the actual risks. One of our biggest lending and investment countries, where we find the best returns with less problems with regulators, is actually Pakistan. However, commercial banks see the country as high-risk on the back of perceived risks.”
If governments in the region can iron out their investment frameworks and build a bankable project pipeline, as more foreign investors make their way to Asian shores, those perceived risks might really become a thing of the past.