Fragmented Asia: challenges and premiums

Each country in emerging Asia is its own world, but being one of the few to establish an infrastructure platform there can mean enticing returns, according to Partners Group.    

Emerging markets present an “an interesting value play” in renewable energy infrastructure worldwide, but the fragmentation and rapid development of the emerging Asian markets entails both a greater amount of work up front and higher returns down the line, according to Benjamin Haan, head of Partners Group’s infrastructure team in Asia.

A recent report by Swiss private markets specialist Partners Group pointed in particular to renewable energy opportunities in Latin America, showing that some emerging markets can have as much as an 11 percent internal rate of return (IRR) premium over developed markets. Three “mega-trends” – the need for energy as a primary infrastructure demand; disconnect between production and consumption; and urbanisation and mobility – make renewable energy a particularly attractive avenue for investors.

“The potential tangible improvements to a country’s economic efficiency through infrastructure reward investors in emerging markets accordingly and offer a compelling proposition with long-term outperformance potential,” the study said.

Haan explains that end-users in emerging Asian markets are ready and willing to pay for the infrastructure services they receive, especially energy, because they realise how much benefit it can bring to their daily lives. As many Asian countries are not yet self-sufficient in energy, governments have also welcomed the renewable energy projects that the likes of Partners Group have developed.

“It’s not necessarily that the support or subsidy available is higher [in emerging markets], but that power prices themselves tend to be higher than in developed markets,” Haan said. While in many developed countries, investors need a heavy market subsidy to make even moderate returns on renewable energy projects, “in some Asian countries the economics of renewable energy can come together even without a subsidy”.

Asia presents at least one challenge to investors which is different from other emerging market regions, and that is its diversity, Haan continues. Markets may be next door geographically, but they might as well be thousands of miles apart in other respects. The market and politics of Thailand, for example, are unrecognisable from those of Indonesia, which is different again from the Philippines, he says. Returns are also far from uniform.

This has made building up a regional platform for Asia particularly difficult and to date there are very few funds targeting the region (or even countries within the region) that have realised returns, Haan said. Although Partners Group values diversification in its funds, “in Asia we can be happy to do several projects in one country, because it just takes so long to get up to speed on that one market,” he explains.

Yet the few that can build relationships and projects in the region into a platform will enjoy a healthy return premium. Haan considers renewable energy in Asia to be in the sweet spot of “immature, but maturing,” and, in the right markets, the returns should more than make up for the risk.

“The returns can be very attractive if you become one of the few [investors] to set up here, and you have done your homework on the markets,” Haan told Infrastructure Investor.