Korean financial firms struggle to sell pricey infra assets

‘Very aggressive’ cashflow assumptions and valuations calculated based on desired returns are being used to lure buyers, LPs say.

Korean investment banks and securities firms are struggling to sell down their overseas infrastructure assets, as concerns over expensive valuations grow among domestic investors like insurance companies, several market sources told Infrastructure Investor.

“Investors are starting to realise that assets can’t deliver the right returns due to high valuations,” one of the sources said.

Information memoranda used to market the assets include “very aggressive” cashflow assumptions, that can’t be met during the holding period, Infrastructure Investor learned.

Two sources suggested that, in some instances, financial institutions are scrapping underwriting fees and offering discounted prices to make the deals more attractive for limited partners.

A third source from a Korean insurance company also described a bullish market, in which investment banks “reverse-calculate” the valuation of an asset based on the return investors want, rather than on its underlying characteristics.

Investors from the country have been on an infrastructure shopping spree overseas in recent years, encouraged by favourable local regulations for insurance companies and a lack of infrastructure opportunities at home.

Korean securities firms and investment banks have been active in equity and, to a greater extent, debt, in the US energy market and the European PPP and renewables sectors.

As demand has grown domestically, Korean investment banks and securities firms have been aggressively bidding for assets abroad – and driving up prices in the process – as they hunt for assets to sell down at home, sources told Infrastructure Investor.

“I don’t participate in auctions when I see that Korean investment banks are in the race, as they will drive the valuation up,” one of the sources said.

Another interviewee complained about financial institutions failing to “seriously” analyse underlying risks of overseas assets, such as currency risk, as they aim to sell them down immediately instead of keeping them on their balance sheet.

Institutional investors are pushing underwriters to retain part of the portfolios on their books, sources told Infrastructure Investor.

But not everyone seems equally worried: another Korean LP brushed off these concerns, saying that the current difficulties to sell down assets might be attributed to an “excess of supply” in the market.

“Investment banks tend to be optimistic [with their valuations],” the LP admitted. “But we know what we are investing in,” the source stressed.

Appetite undiminished

Will the concerns surrounding infrastructure valuations lead to a change of heart among Korean investors? Although most sources stressed that institutional investors are becoming more cautious, they made a distinction between large LPs and smaller ones.

While the former can invest through global asset managers and have started to build their direct investment capabilities, the latter still rely on local general partners and financial institutions to gain access to the market.

“The smaller LPs can’t invest in global funds, they need to invest through Korean investment banks,” one of the sources said.

The country’s asset managers might be caught up in a similar dilemma, as some also source deals through local underwriters operating overseas.

“Under these circumstances, prudent asset managers will earn a good reputation,” one of the sources said.

Furthermore, capital deployment requirements might push LPs to buy what’s on offer, especially if the assets come at a discounted rate.

“At the end of the year, when it’s time to evaluate their performance, some Korean investors might need to deploy capital and securities firms will offer a portion of their [infrastructure] portfolio at a discounted price,” a source from an insurance company said.

From a regional perspective, investors are expected to remain focused on North America and Western Europe – despite increased competition in those markets – rather than exploring less-crowded developing markets.

One of the reasons for doing so is the introduction of a new regulatory framework for insurance companies that will become effective in 2021, a source explained. The new framework includes the K-Insurance Capital Standard, which provides a capital charge reduction for projects in developed countries.

For the time being, appetite for infrastructure in South Korea remains undiminished, but asset owners might have to provide more answers to buyers from now on.