The next generation of infrastructure investors

Asian LPs are emerging with significant commitments to infrastructure in developed markets. What's driving them? Nia Tam finds out

Even a cursory glance at last year's landscape will suffice to reveal the importance of Asia as a fundraising destination.

“In the past few years, we have seen more and more capital flow from Asia to the developed markets and I think it will be a trend that continues,” says Michael Henningsen, a Hong Kong-based partner at placement agent First Avenue.

“It is partly driven by the low returns across more traditional asset classes, like equities and fixed income, while alternative asset classes continue to outperform,” he adds. Infrastructure (as well as real estate) stands out as an asset class that investors can more easily understand.

Kerry Ching, managing director of Asia at AMP Capital agrees, pointing out that “the momentum of Asian LPs looking [at] overseas markets began four to five years ago, when interest rates in the region started to drop”. In addition to the pursuit of better returns, the consistent and stable cashflows as well as the diversification benefits infrastructure brings to investors' portfolios are the driving forces for Asian investors looking at overseas market opportunities, Ching explains.

The volatility in Asian currency exchange rates is also a contributing factor, she adds: “Investing [in places] where the currency is strong, such as the US, makes sense when investors' home currency remains low [as] the investments can benefit from the stronger dollars on top of the actual returns.”

Lack of correlation with traditional assets plays its part, but a Dai-ichi Life spokesperson tells Infrastructure Investor the insurer is attracted by real assets' need for new money. That led it to start investing in infrastructure in 2013 and last year alone it made nine infrastructure investments, including a €30 million investment in a German offshore wind farm. For its most recent move, the firm teamed up with Japan Post Insurance to co-finance domestic solar projects.

Asian insurance companies are also going overseas to get the kind of high-quality, long-duration credit opportunities they cannot easily find at home, explains James Wilson, senior managing director and co-head of Macquarie Infrastructure Debt Investment Solutions. “Infrastructure assets, such as renewable projects and social infrastructure, can also be helpful from an ESG perspective,” he adds.

Unlike in Europe, though, Asian LPs are generally bigger in size but fewer in number, points out Niklas Amundsson, managing director at placement agent Monument Group. This has set a natural bias for fund manager selection, as only larger-scale funds can accommodate their bigger tickets.

“Even the largest [Asian] investors are generally investing via a specialised fund manager to access this asset class, so they can benefit from the relationships and capacity of the fund manager,” says Wilson. On the debt side, he notes that pension funds and quasi-sovereigns have been more active within the non-investment grade space, as they are trying to capture returns which are inefficient from an insurer bound by Solvency II's capital requirements.

 

Rising stars

 

While most Asian investors are at the early stages of developing their infrastructure portfolios, Amundsson highlights investors from Taiwan as one group to watch, as they ramp up commitments to the asset class. 

 

“Taiwan's insurance companies have a 2 percent cap on their allocation to private equity. As their deployed capital is close to hitting that cap, infrastructure funds, which are not included in the capped allocation, offer an option for their growing pool of capital,” he asserts.

 

In February, two major Taiwanese life insurers – Fubon Life Insurance and Nan Shan Life Insurance – among other Asian and global investors, committed to EQT's third infrastructure vehicle, which closed recently at €4 billion (see p. 32).

 

Amundsson notes that Nan Shan Life's commitment to EQT signalled the start of its infrastructure exposure. The insurer also told Infrastructure Investor's research team earlier in January that it was interested in investments in Europe and the US, with a focus on the transport and telecoms sectors. It added it is planning to invest in 10 to 20 funds, deploying ticket sizes from $50 million to $200 million, across various alternative asset classes.

Considering Nan Shan Life built its private equity portfolio from zero to 2 percent in a mere two years, Amundsson expects it could build out its infrastructure exposure at a similar rate. Together with the Japanese and Korean institutions that have expressed an interest in increasing their infrastructure allocations over the past year, it is not surprising to hear Amundsson describe North Asian LPs as the next generation of infrastructure investors.

What about China?

You might have noticed there is one weighty country we have not mentioned so far: China. Despite a strong interest in overseas assets, Chinese investors are often restricted from a political standpoint. The Chinese government has expressed concerns over capital outflows in the past few years and since then it has been encouraging institutional money into domestic infrastructure to stimulate economic growth.

The increasing regulatory scrutiny over foreign ownership of businesses with national security or strategic importance – like energy infrastructure, high-end technology and electronics – has also put a dampener on Chinese investors' overseas shopping spree.

Linklaters said in a report last month that up to a third of Chinese outbound M&A deals by value, representing $40-$75 billion, was blocked by regulators or withdrawn by investors in 2016. Chinese regulatory approval may present a hurdle, especially for investments not seen to be in line with the acquirer's core business, said the global law firm.

Chinese insurers, for example, are interested in overseas infrastructure assets, but have been handicapped due to central government policies. A Chinese LP we spoke to also echoed this view and explained that, in addition to tightening control on capital outflows, political uncertainty in Europe and the US is making 2017 a challenging year to acquire assets.

Bottom line: do not expect Chinese investors in this year to be as active in overseas acquisitions as before.