We’ve heard it time and again at our Hong Kong, Tokyo and Seoul Summits: infrastructure debt is a perfect match for Korean and Japanese LPs.

In recent months, Dai-ichi Life Insurance, one of Japan’s largest insurers, has acted as the anchor investor in two global infrastructure debt strategies, raised by M&G Investments and Tokyo-based Asset Management One Alternative Investments. The country’s AISIN Employee’s Pension Fund has plans to commit up to $50 million to infrastructure debt.

And some of the biggest asset managers in the sector – such as IFM Investors and AMP Capital – have benefited from growing LP interest from the region.

But what has led Korean and Japanese investors to the asset class in the first place?

A low-interest rate environment has turned it into an attractive proposition for institutions versus fixed-income products, and high liquidity levels in their local markets have pushed LPs to look for opportunities overseas. “Returns are more attractive globally compared to those in domestic markets, and the opportunities abroad are greater,” argues Scott Barker, regional head of APAC at IFM Investors’ debt team.

“Rolling investments [on infrastructure debt] over the course of years have been an attractive opportunity for Korean insurance companies to accurately match assets and liabilities,” adds Andrew Jones, global head of infrastructure debt at AMP Capital.

But it would be a mistake to put Japanese and Korean LPs in the same basket, managers warn. “Many of the investors in Japan have looked at investment in infrastructure debt as a possible stepping stone to pursuing an equity strategy in the future,” says Jones.

Korean LPs, on the other hand, have traditionally played a more active project financing role in their local market, and see investment in infrastructure debt as “complementary” to their already-existing equity strategies. “There is more risk appetite,” Jones adds.

Regulatory advantages

In Korea, local regulations for insurance companies have also played a role in boosting interest for infrastructure debt, due to lower capital charges on “qualified offshore infrastructure investments”. According to AMP Capital, the legal framework “is increasingly driving demand” for their products there.

The adoption of international accounting standard IFRS 17 in 2021 may make infrastructure debt more popular than equity for insurers.

Korean investors prefer European assets over US ones, due to the higher hedging costs of the dollar against the won. Securing a US investment can shave up to 170 basis points off returns, Infrastructure Investor was told. But European assets carry their own downsides. “Returns on European assets are already low anyway, so it’s very tough for us to seek assets,” a Korean LP source explains.

Institutions in Japan face similar costs, but seem to be more comfortable seeking US strategies that provide a natural hedge.

“Hedging costs have been very high, but senior debt for infrastructure financing is given in floating rates, which means there is a correlation between the base rate and hedging costs,” says Jack Wang, a fund manager at Asset Management One Alternative Investments. “That allows us to have a natural hedge [against] some of those rising costs.”

At the same time, as senior debt yields fall, more investors are willing to move up the risk curve. “They are starting to look at junior trenches [and] are ready to take a bit more risk,” Niklas Amundsson of placement agent Monument Group says. As the Korean LP puts it: “We are hungry for returns, and we’d rather go for mezzanine than senior debt right now.”