What a difference six months make. When we caught up with Lennart Blecher for our March keynote interview, the EQT head of real assets couldn’t have been clearer on how he felt about venturing outside his target European and US markets:
“When I was asked to start an infrastructure strategy with EQT, I decided to think about what I didn’t want to do. I didn’t want to do development of infrastructure because it’s too unpredictable. I didn’t want to deal with emerging markets because I’ve lost my hair and become grey by developing private power projects in India with ABB.”
It was easy to see why: with three successful fundraises under its belt worth over €7 billion and Funds I and II returning 26 and 35 percent respectively, according to sources we spoke with at the time, why change a brownfield OECD strategy that is manifestly not broken?
Yet six months later, EQT Infrastructure is expanding into Asia together with Temasek, the Singapore government-backed investment firm, to explore brownfield opportunities in communications, transportation, energy and social infrastructure. The countries the partnership will target include those in Southeast Asia, as well as India, Korea, Japan, Australia and New Zealand.
Which means a good chunk of that list has the potential to up Blecher’s grey-hair count.
What changed his mind, then? We can only speculate, but it’s probably not dissimilar to what’s going through the minds of the four Danish pension funds that have committed $650 million to AP Moller Capital’s new, $1 billion Africa-focused fund: a belated recognition that things have changed and emerging markets are well worth having a look at, especially as asset supply and returns become increasingly constrained in the OECD world.
On the face of it, these moves seem counterintuitive. As we reported in last month’s emerging markets In Focus, 2016 was the annus horribilis of emerging market private infrastructure investment, with the total amount contracting by 37 percent to $71 billion – the lowest level of investment in a decade.
But that headline figure doesn’t tell the whole story. That’s partly because Turkey’s multibillion dollar IGA Airport deal weighed heavily on 2015 totals, but also because, as EBRD head of infrastructure policy Matthew Jordan-Tank told us, there’s quite a lot of preparation going on for the next batch of emerging market projects: “In three years’ time, you are going to see a real uplift in emerging market-infrastructure,” he predicted.
The trick with emerging markets was always to look beyond the sound and fury at the actual project default rates – which are very low, as Moody’s will tell you – as well as what underpins the actual projects, i.e. whether they are backed by strong demand and supported by committed governments.
It’s equally important to approach these markets with the right mind set. That you can make good returns from emerging markets infrastructure is beyond doubt – just look at IDFC’s recent exit from Indian renewables developer Piramal, which generated a chunky 18 percent return.
Still, as Jurie Swart, chief executive of African Infrastructure Investment Managers told us recently: “I don’t believe outsized returns are available in any of these projects. And to be honest, I don’t think they would be sustainable. If your deal is too good to be true, it’s going to unwind at some point.”
I Squared partner Gautam Bandhari went even further at our Berlin conference earlier this year, pointing out that “the biggest reason for investing in emerging markets is not returns, it’s diversification”.
At some point, if you’ve stuck to your investment thesis long enough, you are bound to come up against the law of diminishing returns, especially in a highly competitive environment. Trying that thesis out in new markets – as opposed to stretching it in questionable directions – seems like the healthier way to grow.