While global institutional investors can see the appeal of investing in the infrastructure of a number of Asian emerging markets, especially China and India, many remain largely under-exposed, if exposed at all.
The relatively undeveloped state of infrastructure in India is at once its biggest attraction to investors – particularly those who have tended to make direct investments in infrastructure elsewhere – and also its most off-putting feature to outsiders.
For the first-time visitor to the country, the traffic conditions alone can be exhausting. After a series of meetings in the bustling city of Mumbai, the visitor is normally able to retreat to the comforts of a five-star hotel, but the honking of horns continues to ring in his or her head. The brave – or foolhardy – few who have attempted to cross the road in a number of Indian cities go home with the impression that it is a place where traffic rules are seemingly absent.
“Can you imagine what must run through the mind of the guy from [a North American] pension plan stuck in congestion to find a cow in the middle of the road bringing traffic to a complete halt?” asked one investor, who placed India in third place, after Australia and China, in terms of the appeal of infrastructure as an investment.
The often staggering differences between India’s cities and their Western counterparts have caused a number of international investors to back off after visiting the country. These LPs go away feeling they are probably not ready to invest directly into Indian infrastructure, at least in the same manner they have managed to in the UK, Europe, North America and Australia, despite the obvious demand for their capital.
Yet the undeveloped nature of the infrastructure in emerging Asian markets is exactly why fund managers with local knowledge are confident of producing out-sized returns from investing in these countries. Admittedly, a number of the fund managers on the ground are relatively new, hence only a handful have so far been able to show their ability to deliver these promised returns.
That said, one simple fact works in favour of their argument: India requires an estimated $1.7 trillion worth of infrastructure investments and the government is not in the position to fully finance the country’s needs.
Most infrastructure fund managers will admit the journey it takes to bring transactions to a close can be long and arduous, but there are encouraging signs of progress in the modernisation of the country’s infrastructure. The international airports at Bangalore, Delhi, Mumbai and Hyderabad, and Mumbai’s brand new Bandra-Worli Sea Link bridge are iconic examples of an exciting trend.
Private sector investment featured prominently in the creation of these landmark assets, and is bound to become even more prevalent and influential over time. But in the meantime, international institutions are waiting to see how the six or so leading India infrastructure funds investing in the country will perform before they commit to any follow-up offerings. International capital investing directly in the country will take even longer to be seen as viable.
The potential for returns is no doubt great. But the point remains: India’s infrastructure asset class is not an investment for the faint-hearted – nor for any tourists.