As capital-intensive industries develop and ambitious infrastructure programmes are set up across the emerging world, institutional investors are set to benefit from a wider array of investable opportunities, delegates heard at Infrastructure Investor’s Emerging Market Forum today.
Bernard Sheahan, global head of infrastructure at the International Finance Corporation (IFC), during a keynote interview underlined that one of the most significant barriers to a wider involvement of institutionals in emerging markets would soon ease as a growing stream of large-scale assets, requiring bigger equity cheques, would soon emerge on investors’ radars.
In the past, infrastructure transactions in which the IFC were involved averaged $20 million in size – but over the last couple of years, he said, this figure had jumped to nearly $100 million.
This was because of the development of sectors such as energy and mining, where the need for associated infrastructure was starting to feed a pipeline of sizeable individual projects.
With the advent of larger infrastructure programmes, furthermore, a number of players that traditionally dominated local markets found their balance sheet “did not take them as far as they would like”. This created the space for partnerships and platforms to be formed, he said.
Sheahan also argued that early investments in emerging markets had posted very strong performance, pointing out that IFC had achieved average returns of 20 percent per annum and 2x money multiples on the capital it had deployed so far in developing countries.
More capital chasing deals in emerging markets would mean these returns wouldn’t be sustained everywhere, he admitted. But he reckoned the supply of opportunity would continue to grow faster than the supply of money across a good number of countries.
“At the frontier of previous opportunities we find places where returns are especially high. And the volume of these extra-yield opportunities is going to get quite a lot bigger.”
That would be particularly true in markets where initial reforms, beginning to bear fruit, were being continued – leading these countries to achieve better sovereign ratings and elicit stronger interest from overseas investors. “We see that happening across many more markets than we have in the past.”
The biggest sin new investors were guilty of when looking at emerging markets was to lump them together and assume they constituted a homogeneous category, he said.
But he noted that “there is a hint things are changing”. If only two-thirds of the economic growth observers expect from emerging markets materialised, he argued, then the need for new infrastructure would vastly outstrip what public purses were able to fund.
“The pace of change in emerging markets is creating much more of a critical mass for investable projects to come to market.”