What is the role of “Asia” and “infrastructure” in APG’s investment portfolio? How is infrastructure performing against other asset classes and your benchmark?
HMA: The aim of our infrastructure portfolio is to achieve stable income and capital growth in the long term. Our mandate is currently purely focused on non-listed equity and equity-related investments and we distinguish ourselves by taking a true long-term view. To achieve an optimal risk-return profile, investments are spread across contract/investment styles, regions and sectors.
Our clients have a preference for infrastructure assets with substantially contracted or regulated revenue streams providing downside protection. However, we’re also targeting to build up a portfolio with a diversified revenue risk profile which will enhance the overall portfolio return. We believe this is where Asia comes into play.
The overall performance of our infrastructure portfolio has been satisfactory with our direct investments substantially outperforming our indirect investments.
APG is making active moves in emerging markets in Asia, about which lots of investors especially pension funds still remain cautious. What is the rationale behind it?
HMA: Asia is a key focus for APG. Asia’s long-term compelling market dynamics are expected to enhance the overall return of our investment portfolio and to offer diversification benefits.
We see large institutional investors are showing growing appetite for direct investment in infrastructure. Have directs become APG’s top priority for investment in Asia Pacific?
HMA: We indeed seek to expand our investment portfolio mostly through partnerships. These include club deals with like-minded investors as well as joint ventures with strategic partners. This allows us to steer our portfolio composition much better, retain discretion over key investment decisions and to invest in a more cost-efficient way.
Is regulatory risk your major concern? Are there any other factors/considerations that you consider important for investment in Asia?
HMA: Regulatory risk is often perceived as one of the key concerns by investors in emerging market infrastructure. Investors would therefore demand a premium to be compensated for taking this risk. Interestingly enough, unexpected regulatory changes have become more apparent in developed markets than in emerging markets.
APG targets investments in jurisdictions characterised by a stable political climate and a history of stable regulations. Besides, we believe that it is crucial to team up with the right local partners in order to further mitigate the risks associated with investing in emerging markets.
A few months ago, APG entered into a joint venture with Piramal Enterprises to invest in indebted Indian infrastructure companies.
Could you tell us more about this deal and your views on the India infrastructure market?
HMA: In late July, we formed a strategic alliance with Piramal Enterprises to provide mezzanine funding to Indian infrastructure companies. Both Piramal and APG are initially putting in $375 million with a targeted investment of $1 billion and we are quite confident that we will be able to invest this amount in the next three years.
The outlook for India has improved significantly after the change in government. The new government has a much better power base than its predecessors and is committed to implementing key reforms that are aimed at further development and economic growth. The infrastructure sector is expected to be one of the key beneficiaries of the key reforms that the new government is planning to undertake.
We are seeing a host of opportunities available in the infrastructure sector. On one hand there is a large pool of operational assets held on the balance sheets of developers which need to deleverage and recycle capital. On the other hand, there are a lot of infrastructure projects that require last-mile funding in order to achieve project completion.
What are your criteria for an ideal local partner?
HMA: As a pension fund asset manager, we are an investor with a true long-term horizon. The aim is to team up with best-in-class, local well-aligned partners in various markets to create long-term partnerships. In the selection of a partner, alignment, requisite expertise and industry knowledge to add value through active ownership are all important criteria.
What features arouse your interest when a GP introduces their new fund to you?
HMA: As I mentioned before, most of our current activity is focused on direct and co-investments. We still selectively invest in funds, for instance funds with an investment strategy targeted at certain jurisdictions or niche sectors where the average ticket size may be too small for us to invest directly as it would take up too much of our internal resources.
What are your views on infrastructure debt investment opportunities?
HMA: The focus of our infrastructure mandate is primarily on non-listed equity and equity-related investments. APG invests in infrastructure debt through its fixed income portfolio, predominantly bonds in companies that build and/or invest in infrastructure. Especially, inflation-linked debt is considered to be attractive as it can help our clients match their liabilities.