Beasts from the East

Two of the world’s largest savings pools – Japan Post Insurance and Korea Post – are leading the way, as a host of Asian investors eye the infrastructure market, attendees at our Seoul and Tokyo summits heard.

In late April, we hosted our inaugural Seoul Summit and our fourth Tokyo Summit with more than 500 industry stakeholders attending both. Here are five key takeaways:

Floodgates are opening

Driven by the need to diversify their portfolios – which mainly comprise stocks and treasuries – investors from Japan and Korea were keen to actively engage with GPs and gatekeepers at our conferences.

The $718 billion Japan Post Insurance, for example, which started investing in infrastructure last December, not only has a three-year plan to ramp up its alternatives exposure to 1.5 percent, but is also planning long-term – building office capacity to lay foundations for a decade building its infrastructure portfolio.

The $120 billion Korea Post was also quick to make good on its word. After the head of global real assets at the institution’s insurance arm, Jinho Lee, on stage openly urged global GPs to contact him directly, the Korean LP followed up with a RFP for a $500 million global infrastructure mandate the following week, as it hopes to meet its 5 percent allocation to alternatives.

Up the risk/learning curve

“In the last 15 years, we’ve seen domestic savings get better organised within countries in Asia, such as Korea,” John Walker, vice chairman of Asia at Macquarie Capital, told us. Now, Asian investors are moving further along the risk curve, investing in construction projects and even taking on development risk, Walker added.

That trend is particularly obvious among Korean LPs, with substantial experience gained from the domestic infrastructure market in previous years. Going beyond funds, Korean investors are getting more sophisticated, dabbling in co-investments and going direct. Japanese LPs are catching up, but their current key interest is in fund investments, particularly in infrastructure debt and core strategies.

Careful what you pitch for

As a relatively new asset class, the definition of infrastructure is still fluid. Allen & Overy’s David Lee highlighted a “blurring [of the] lines between private equity and infrastructure” as a feature of the European market during a presentation in Seoul. Asian investors are certainly aware of it.

“We assume infrastructure is something stable and cash-yielding for the long term,” said Motoyuki Takahashi, who manages the infrastructure portfolio at Sompo Japan Nipponkoa Insurance, during a panel discussion in Seoul. But that’s “not really true”, he added, explaining he sometimes found his infrastructure investment portfolio looked rather different from what GPs had originally proposed.

A Korean LP who preferred to remain unnamed echoed Takahashi’s view, saying he was often confused whether the proposals put in front of him related to infrastructure or private equity investments.

LP-GP ‘chemistry’ is key

When it comes to selecting the right fund manager, “chemistry” between the investor and the fund manager is essential, according to Tadasu Matsuo, head of alternative investments at Japan Post Insurance. He noted that “face-to-face meetings” are important for Japanese LPs to get to know potential GPs and their funds’ competitive advantages, as well as assess GPs’ expertise and capabilities.

In terms of how GPs should approach LPs, Korea Post’s Lee noted that he is looking forward to like-minded GPs bringing along investment ideas on which they can “work together”, instead of simply coming to Korea for vanilla fundraisings.

Challenges from within

Limited budget, language barriers and constraints on human resources have made it challenging for LPs to conduct due diligence, particularly on overseas investments.

Currency risk is more of an issue for Korean investors, as the discount on the won-dollar swap could essentially eat away at returns from US dollar-denominated investments.

Despite the challenges, two of the world’s largest savings pools are ready to open their pockets for more overseas infrastructure investments. Is the global infrastructure community ready for them?