Improving infrastructure

Fundraising for infrastructure investments in emerging markets has grown tremendously in 2006 – across virtually all regions. By Judy Kuan.

In recent years, infrastructure assets – particularly those within the emerging markets – have largely been skipped over by private equity funds, with few investments taking place. Quantitative evidence from data provider Dealogic shows that sponsor-backed infrastructure buyouts in Latin America, Central and Eastern Europe, North Asia and Southeast Asia totalled $664 million in only 13 deals from January 2005 to date.

However, if this year’s fundraising for infrastructure funds targeting emerging markets is any indication, the sector could be warming up for more activity.

Infrastructure: drawing capital to the emerging markets

Just yesterday, Darby Overseas Investments Ltd announced that its oversubscribed Korea Emerging Infrastructure Fund (KEIF), to be jointly managed with Korea-based Hana Bank, closed at W580 billion (€482 million; $610 million). The announcement comes only a few months after KB Asset Management was given the green light by Korea’s Ministry of Planning and Budget to launch a W1.2 trillion infrastructure fund aimed at toll roads and railways investments, according to The Korea Herald.

But it isn’t just Asia. Last week, Conduit Capital Partners told PEO that it had wrapped up fundraising for its Latin Power III fund, which rounded up $393 million for investing in power generation projects across Latin America. The Inter-American Development Bank also announced its approval of up to $60 million in the form of a senior loan to the Central American Mezzanine Infrastructure Fund, which is targeting $150 million and will be managed by EMP Global, a Washington-headquartered emerging markets private equity firm.
In the Middle East, Abraaj Capital entered into a joint venture with Deutsche Bank and Ithmar Bank, to raise a $2 billion Shariah-compliant alternative investment fund, Infrastructure and Growth Capital Fund, targeting stakes in privatisations, buyouts and restructurings in the Middle East. The Abraaj joint venture was announced in May, following the previous month’s announcements of two new infrastructure funds being launched to target the Middle East. One fund is the $500 million fund being established by the investment arm of Dubai Holdings and HSBC Bank, to invest in infrastructure across the Middle East and North Africa. The other is the launch of ZonesCorp Infrastructure Fund, a 1 billion dirham ($272 million) infrastructure fund to be co-managed by Macquarie Bank and Abu Dhabi Commercial Bank. ZonesCorp is the first infrastructure fund created in the Abu Dhabi emirate.

Even in the developed markets, interest in infrastructure-oriented investments has grown noticeably, with JPMorgan Asset Management and The Carlyle Group launching infrastructure investment groups in the US.

Infrastructure has had a mixed track record for private equity funds, especially in the emerging markets, given the approach that local regulators and government authorities have previously taken toward the sector. However, the need for improved infrastructure in emerging markets has not escaped local authorities, and this recognition is translating into a friendlier investment environment for private equity firms.

For instance, in the case of Korea, “Korea is actively promoting development of its private infrastructure sector to help sustain long-term economic growth and productivity,” said Darby chief executive Richard Frank in the press announcement for the KEIF. “We see excellent opportunities for investment.”

In the same announcement, Hana president Jong Yeul Kim stated, “Infrastructure funds have been rapidly replacing construction companies as the major providers of equity and mezzanine capital to infrastructure projects in Korea. Institutional investors have decided to participate in KEIF to better cope with the market change.”

With the increasing number and size of funds that have been raised this year to invest in emerging markets infrastructure, it would be hard to imagine that this will not augur an increased volume of private equity-backed investments into this space in upcoming years.