The Asia-Pacific region has been active in global infrastructure investment over the past five years, raising $28.63 billion for infrastructure funds between 2015 and 2019, according to Infrastructure Investor data.
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In Asia, South Korea has been a key player in the asset class, with several Korean financial institutions establishing dedicated investment teams about four years ago and looking into the market in earnest. Many Korean LPs, such as one of the world’s largest pension fund, the National Pension Service, have invested in global transportation, renewables and midstream in that time.
Despite the global economic slowdown caused by covid-19, three Korean LPs we spoke to expect private capital to keep flowing from Korea into global infrastructure assets after the second quarter and will increase in the long term. Speaking on the condition of anonymity, the LPs said they will keep exploring opportunities in the sector but with a more critical eye than before the pandemic.
“I think the infrastructure investment market will be slow until the second quarter [at least],” a senior investment manager at a Korean insurance company said. “The alternative assets have lower expected profits now, compared with those with the same risk before covid-19. Asking prices for the assets are still high [despite dealflow slowing down]. Repricing is needed.”
A manager at another life insurance company agreed that investment activity won’t resume before July, noting most deal processes in the sector have been suspended. However, he expects Korean LPs to execute investments in the second half of the year at the latest to meet their cost of capital.
“The cost of capital for our savings insurance plan is around 3 percent. To meet that rate, we need to invest in assets that have 4.5-5 percent of return. [Of the 5 percent return], 3 percent will be returned to our policy holders, 1-1.5 percent will be used for transaction and administration fees, and the other 0.5 percent is our revenue,” he said.
“It is getting harder to find assets with that high rate of return these days. Some central banks abroad [have] adopted negative interest rate policy, [reducing] profitability. I believe all Korean LPs will increase investment in infrastructure.”
A senior executive at a prominent pension fund in Korea also said they would increase investment in alternative assets, including infrastructure, to generate more revenue.
“Like other pension funds, we have a target revenue to achieve every year. This is more proper for alternative investment than stocks and bonds in terms of raising revenue. Also, alternative asset investment has [more of a] liquidity premium than stocks and bonds,” he said.
As for infrastructure sub-sectors, the three investment professionals had differing views on the post-coronavirus market.
The senior executive at the pension fund expects the telecoms sector, especially data centres, to have great potential given that working from home has become so widespread as many countries around the world have gone into lockdown.
“The global demand and valuation on network and cloud services is high. Korean LPs are not active in this market as the sector is new. However, this is an attractive sector that we might consider in the long term as building a data centre takes a few years,” he said.
The manager at the life insurer on the other hand, doesn’t consider data centres to be attractive assets. “What will happen if computer viruses spread like the coronavirus?” he asked.
Instead of choosing specific sub-sectors, LPs should decide on an investment strategy first, he said.
“There are assets [that have] strong downside protection with low rate of return and assets that have weak downside protection with [a] high risk-high return [profile]. Then, we can decide how to diversify the portfolio, whether to have debt alone, invest long-term or short-term, focus on [the] domestic or foreign market, and so on,” he explained.
But, regardless of the strategy and sub-sectors LPs decide to pursue, the pandemic provides “a good opportunity to review our assets and to evaluate GPs, in terms of how they deal with the crisis”, the life insurance manager said.