An emerging slump

There has been a marked fall in institutional investor interest in emerging markets, according to the Infrastructure Institutional Investor Survey 2014, compiled by placement agent Probitas Partners.

The survey found investors are concerned that emerging market risks have increased significantly while anticipation of strong growth in these markets has fallen noticeably due to the impact of economic and political issues.

The percentage of respondents to the survey who said they were less interested in emerging markets due to political, economic or currency risk increased to 58 percent this year from 23 percent last year. Furthermore, those interested in emerging markets infrastructure because of its long-term growth potential fell from 45 percent in 2013 to 17 percent this time.

While just six percent of respondents said they invested in funds with an investment mandate focused on emerging markets, the figures for North American, Western European and global funds were 67 percent, 64 percent and 56 percent respectively.

There was some interest expressed in Asian funds, but interest in funds targeting the Middle East/North Africa, Sub-Saharan Africa, Eastern Europe and Latin America appears to be negligible.

Overall, the study found infrastructure fundraising to be buoyant. Last year, funds raised a total of $35.8 billion – second only to the record fundraising year of 2007, when $39.7 billion was raised. It was noted that fundraising so far in 2014 has also been strong, though slower than 2013’s pace.

In terms of strategy, a combined brownfield/greenfield approach is the most popular part of the market – although most funds with this combined strategy have a bias towards brownfield investing. Interest in greenfield-only funds continues to be weak.

The survey found that interest in infrastructure debt funds continues to accelerate. A new sector within the market, debt funds accounted for 23 percent of the fundraising total in 2013 compared with 12 percent the previous year. Thirty percent of respondents said they will be either actively or opportunistically targeting debt funds over the next year.

With capital piling into core brownfield assets, the biggest fear for investors is too much money coming into the market and increasing the risk that returns will be negatively impacted – this fear has continued to increase over the last two years.

As things stand, 83 percent of investors say they are expecting net returns on core brownfield investments of 12.5 percent or less with low volatility. Target management fees are 1.25 percent or less and carried interest 15 percent or less.