Volatility makes Asia 'opportunistic' rather than 'core'

The high risk profile of Asian infrastructure makes it more of an opportunistic play for pensions rather than core, according to a speaker at the Infrastructure Investor: Asia forum in Singapore. There is also confusion about some funds' investment mandates.

The Asian infrastructure investment market is blighted by a mismatch between institutional investors' expectations of fund managers and what those fund managers are capable of delivering, according to panellists speaking on the second day of PEI Media's Infrastructure Investor: Asia forum in Singapore.
 
Hans-Martin Aerts, head of infrastructure Asia in the Hong Kong office of APG Asset Management, which manages €250 billion of Dutch pension assets, said there was “a bit of a contradiction” in Asia whereby “GPs promise high teens returns and LPs expect them to deliver on those returns while also expecting them to invest in core infrastructure. But the only way they can make those returns is to do greenfield and growth capital deals where the uncertainty is much higher.”

Against a background of increasing calls for greater pension investment in infrastructure, Aerts pointed out that Asian infrastructure does not fit the same mould as in the developed world: “Greenfield investment doesn't give long-term, stable yield,” he said. “Revenues have a high level of uncertainty. Furthermore, you have a higher risk profile in areas like transparency and in the legal, political and regulatory frameworks. The higher level of volatility makes it [exposure to Asian infrastructure] more of an opportunistic play rather than a core infrastructure play.” He said that while APG's focus was on core infrastructure, it will also invest opportunistically to achieve diversification and to enhance the overall return of the infrastructure portfolio.  
 
Ben Haan, assistant vice president of private infrastructure at alternative investment firm Partners Group in Sydney, said a further difficulty for investors in Asian infrastructure was the blurring of funds' investment boundaries into areas such as real estate, private equity and 'related resources'. “Funds need to stick to true infrastructure; that's what we want,” he said.  
 
Haan highlighted other areas of concern, such as the need to closely examine manager incentivisation given that most Asian infrastructure funds are sponsored; and the requirement to look hard at the credibility of target returns given a tendency to over-promise. With reference to India, he pointed to the sheer volume of new funds in the market – and that not all of these will be viable. “In Asia there is so much flux, and in India in particular there are a lot of managers who have never raised money. We don't want to waste time and due diligence on funds where there's no prospect of the capital being raised.”
 
Haan added that the secondaries market had proved fruitful recently for Partners Group, whose target allocation for Asian infrastructure is 15 to 20 percent of its global total. He said the firm has acquired two positions in favoured Asian funds from distressed sellers at discounts of up to 30 percent – with a third in the pipeline.
 
He also said that the valuation of developed world infrastructure assets in Partners Group's portfolio had shown a greater uptick this year than its Asian assets. This was in contrast to the prior outperformance of Asian assets.