Political instability, economic turmoil and the uncertainty that follows have always been issues investors have had to tackle. As we were going to press, the UK was just days away from deciding whether it will stay or leave the European Union, making markets very jittery. At the same time, the International Monetary Fund was sounding the alarm that political risk could very well hurt a fragile eurozone recovery. And that is just in developed markets.
So how does an institution that invests solely in emerging markets, where political risk tends to be more prevalent, navigate an increasingly complex landscape and mitigate the associated risks? “We don’t invest in countries, we invest in companies,” Viktor Kats, co-head of the IFC Asset Management Global Infrastructure Fund, replies during a recent interview.
Launched as the asset management arm of the International Finance Corporation (IFC) in 2009, IFC Asset Management has found that opportunities for infrastructure capital can be found in countries that may or may not be on investors’ radars.
Kats cites Colombia as an example. Over the past decade, the South American country has had to contend with gang wars, drug trafficking and violence in general. “But Colombia is also a place where the legal system has been stable for many years and throughout turbulent times; a place where democracy functions and a judicial system works effectively,” Kats explains. “There are many examples like that where the headlines do not do justice to the situation on the ground.”
Speaking of headlines, Brazil has generated its fair share in the past few years, initially because of its impressive economic growth and its hosting of two major sporting events, but more recently because of a corruption scandal that has led to President Dilma Rousseff being suspended.
According to Kats, Brazil “is a very good example of how a company or asset can be an excellent opportunity even though the country is going through difficult times.” He is referring to Aegea, a water and wastewater company IFC Asset Management invested in through the IFC Global Infrastructure Fund, a $1.2 billion vehicle the organisation closed in 2013.
“You have a situation where state and municipal governments, due to budget constraints, are looking for private sector partners to manage water and sewerage concessions. But many of the private players’ activities in the sector have been diminished because of the corruption scandal.”
Aegea has attracted the attention of municipalities seeking private partners as well as the welcome attention of lenders and investors since it is “one of the few players left standing in a very difficult marketplace”.
The same applies to Turkey, a market that has attracted significant foreign investment, but which is also facing its own set of challenges stemming from a shift towards a more authoritarian regime and an increasing number of terrorist attacks.
“Turkey has both an advantage and disadvantage,” Kats observes. “On the one hand, it’s located in a region that is quite volatile and subject to significant geopolitical pressures; on the other hand, it carries economic weight and has a role to play in the region.”
Last year, IFC Asset Management invested in Turkey’s power sector. “When we invested in Gama Enerji, we anticipated that there may be challenges,” Kats says. “That said, we stuck with it as part of our long-term investment strategy.”
Despite the political instability, Kats and his team proceeded with the investment because of the power sector itself: it is well developed, and has been privatised and functioning well for a number of years. “We felt we were investing in one of the best power platforms in the country, which could consolidate its position during the down years and then emerge as the strongest platform potentially five years later. This would be an opportune moment for us to exit if we chose to,” Kats explains. Their investment thesis has already been validated, Kats says, pointing to the partial exit IFC Asset Management realised within 12 months of its investment.
“So I think it goes back to my point that it’s the company that matters, not the country,” he concludes.