Global Investment Forum: Frontier markets worth the risk

Infrastructure investments in developing economies can yield handsome returns – provided investors work with the right partners and structure deals appropriately, according to industry specialists.

Despite resilient challenges, long-term infrastructure investments in frontier markets are worth the risk, panelists taking part in Infrastructure Investor’s Global Investment Forum said in Hong Kong last week.

Jonathan Addison, investment adviser to of Australia’s $567 million (€396 million; $494 million) Meat Industry Employees’ Superannuation Fund, said that attracting local pension funds to infrastructure was a crucial first step in luring foreign investors into emerging markets but that high interest rates – reaching for instance 12 percent in Kenya and 17 percent in Ghana – had until recently desincentivised them to invest in assets other than their own government bonds. But this was changing, he argued, as benchmark rates were now coming down across a number of countries.

“I’m encouraging regulators to open up [the market]: the need for infrastructure is there and if properly structured it can spin off the returns pension funds need. Many large pension funds have allocations to frontier markets and it shouldn’t be hard to turn that into infrastructure investment.”

Raj Thammineni, a managing director for global real assets at JP Morgan Asset Management, said that LPs were increasingly looking to diversify their exposure and recognise that emerging Asian nations offered great prospects for growth capital.

Panelists concurred that a number of challenges still weighted on frontier markets, with currency, political, regulatory and corruption risks all capable of sapping investment returns.

But creative solutions could be crafted to overcome these problems, they said.
Thammineni cited the example of an airport terminal in Sierra Leone, backed by the African Development Bank, where capital “leakage” was avoided through raising air fares and escrowing funds into a euro-denominated account in Paris. This money was then used to service investors and repay debt, allowing for the cash to be traced throughout the whole process.

“If you want to invest long term in infrastructure you need a local partner. If I’m a foreign pension fund and the government changes the rules I can’t call the president – but as a local pension fund they have to take my call,” Addison said.

Lubomir Varbanov, chief investment officer and head global equity at the International Finance Corporation (IFC), shared similar views. “As a minority investor, the IFC never has more than a 50 percent stake in a particular project. Hence the critical aspect of choosing a local partner. However that in itself isn’t just something you can just aspire to: we have our own people on the ground for this. We have a presence in 100 countries and we use that network for the selection of ideal partners.”

Thammineni said this was also relevant when acquiring controlling stakes. “We work with local managers who know the local landscape well.”

Currency and greenfield risks were the next challenges on Lubomir’s list; and while the former could be mitigated through a mix of indexation, savvy choice of investment product and diversification, he said, most investors considering deals in frontier economies had to get comfortable with a degree of the latter.

“If you are looking to go into emerging market infrastructure projects and looking for fully constructed assets that you can just buy and run as efficient operations, that’s not really the nature of the business. It doesn’t mean we do 100 percent greenfield – but most of what we do comprises elements of growth equity expansion potential.”