Global Investment Forum: Asia's new brownfield focus

While the biggest opportunity in Asian emerging markets remains greenfield developments, investors are more attracted to the risk-return profile of operating assets.

Institutional investors are hoping to hedge the risks of emerging markets infrastructure investments by investing in operating assets – an opportunity that has been growing significantly since the global financial crisis, delegates heard at the Infrastructure Investor Global Investment Forum in Hong Kong.

Given the political volatility that has surfaced in emerging markets in the past year, Benjamin Haan, Partners Group's senior vice president of private infrastructure in Asia, confessed that an emerging markets-focused strategy is less attractive than it was 12 months ago. Protests and policy shifts have been strong reminders of the political risk infrastructure investors take in those countries.

“We see money being shipped to Southeast Asia a lot, but the issue will be whether policy can stay stable,” Simon Su, director and chief economist at BMT Asia Pacific, said on the emerging markets panel.

The panel went on to suggest that buying into brownfield, operating assets might be the more attractive option for international investors to enter emerging markets. After years of fast-paced development, emerging markets like India are starting to encounter financial distress in their infrastructure, explained M.K. Sinha, managing partner and chief executive of Indian fund manager IDFC Alternatives.

“Infrastructure was often over-leveraged and encountered execution issues,” Sinha said. “Often what you see is good assets with distressed sponsors – which can give you compelling valuations.”

Sinha added that even though the cash flow of some of these assets may not look attractive now, in three years he predicted they would be “hugely valuable” because of the supply deficit. Some exits IDFC has achieved from its 2008-vintage infrastructure fund have yielded IRRs of 39 percent to 42 percent, he said.

“I wouldn’t have expected to see so many brownfield investment opportunities in emerging markets, but the de-leveraging trend has shifted the balance,” said Viktor Kats, the deputy head of IFC Asset Management’s Global Infrastructure Fund. Senior managing director of Macquarie Infrastructure & Real Assets Steve Gross also pointed out that, of his fund’s 20 investments in Asia, only one has been greenfield.

Speakers agreed that greenfield development still makes up the majority of opportunities in emerging markets, but “all of those are now dealing with last-mile issues like permissions – which are unfortunately the hardest to resolve,” Sinha said. Thus, he and other speakers considered operating assets and brownfield investments to be the more risk-adjusted option.