Macquarie sees ‘transitionary role’ for infra funds in China

Government-owned businesses are looking to sell infrastructure assets in an effort to recycle capital, providing an opportunity to buy, consolidate, transform and re-sell them to long-term sources of capital, according to Benjamin Way, a Beijing-based executive at Macquarie Infrastructure and Real Assets.

Infrastructure funds have a chance to play a “transitionary role” in the Chinese economy by buying assets from government-owned businesses, optimising their operations and selling them to appropriate long-term owners such as pension and insurance funds.

That’s according to Benjamin Way, a managing director of Macquarie’s Infrastructure and Real Assets

I think the story for infrastructure in a place like China, to be honest, will be a lot like the story of private equity

Benjamin Way

group in Beijing, where he oversees the firm’s Chinese and Korean unlisted funds.

“I think the story for infrastructure in a place like China, to be honest, will be a lot like the story of private equity . . . where we’ve seen private equity play that transitionary role where they get [a] business ready for a different sort of buyer,” Way said during a conference call from Beijing.

China, he said, has many state-owned businesses and private corporations which own mature infrastructure assets they are looking to sell in an effort to “recycle” capital for other uses. For example, holders of water concessions that have been operational for five of their 30 years may be looking to exit and use the proceeds for other investments.

Benjamin Way

That provides an opportunity for infrastructure investors to “transform a fragmented industry” through consolidation and institutionalisation of best practices, which will make them attractive to long-term providers of capital such as local pensions and regulated insurance companies. 

“That’s, in a nutshell, our thesis not just in China but also in India,” Way said.

Macquarie has followed a similar strategy in both countries, where the firm has sought out local partners to team up with to raise country-specific infrastructure funds. In India, Macquarie teamed up with the State Bank of India and the International Finance Corporation, which each committed $150 million as cornerstone investors for an Indian infrastructure fund which reached a first close on more than $1 billion in April 2009.

In China, Macquarie partnered with Everbright Limited, one of three Chinese holding companies partly owned by the Chinese finance ministry. In August 2009, Macquarie and Everbright launched a joint venture seeking to raise $1.5 billion across a US and Chinese Yuan-denominated vehicle.

Way said offshore investors have shown a lot of interest in Chinese infrastructure in part due to the scale of the country’s ambition to upgrade its airports, roads and other core assets. The country’s 12th Five Year Plan, approved by the National People’s Congress on 14 March, dedicates 7 trillion Yuan (€737 billion; $1 trillion) for spending for urban infrastructure alone, according to Chinese news agencies. Way estimates the government may spend up to $1.5 trillion on infrastructure by 2020.

“You don’t see that sort of infrastructure plan in most other countries,” he said, adding that the government knows “you can’t keep doing it with uncollateralised cheap debt”. Private capital will be needed and is being invited to help build out the infrastructure.

“Infrastructure as an asset class in China is actually an asset class that is deemed to be an encouraged investment class,” Way said. The government typically divides up investment opportunities into three buckets – those which are restricted to foreign investors, such as defence, those which are permitted but carry a lot of ownership restrictions, such as pharmaceuticals, and those which are encouraged and carry the fewest restrictions.

Infrastructure, by virtue of being encouraged, allows foreign investment and their partners to buy up to 100 percent of infrastructure assets such as toll roads, wastewater treatment plants and ports, Way said.

“It’s not hard or difficult to see how a fund could deploy a billion dollars over the next two or three years,” he said.  “There won’t be a paucity of opportunities.”