We don't invest in countries, we invest in companies

IFC Asset Management’s Viktor Kats talks emerging market political risk at a time when the developed world is rocked by Brexit.

When 52 percent of Britons voted to end their country's EU membership last week, it raised more questions than answers. Far from dispelling the uncertainty that preceded 24 June, the referendum's outcome is indeed fuelling speculations over the implications of Brexit amid a worsening leadership void. 

For emerging market investors, this raises another set of questions. With political risk in a developed market becoming so intractable, how does an institution that invests solely in the developing world – where political risk tends to be more prevalent – mitigate the threats associated with such a complex landscape?

“We don't invest in countries, we invest in companies,” Viktor Kats, co-head of the IFC Asset Management Global Infrastructure Fund, told Infrastructure Investor earlier this month.

Launched as the asset management arm of the International Finance Corporation in 2009, IFC Asset Management has found that opportunities for infrastructure capital can be found in countries that may or may not be front of mind for institutional investors.

Brazil has been on investors’ radars, but while impressive economic growth and robust construction activity attracted investment, now the country finds itself in the headlines because of slowing growth and more importantly because of a corruption scandal that has led to impeachment proceedings against suspended President Dilma Rousseff.

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”. For IFC Asset Management, that company turned out to be Aegea, a water and wastewater company the organisation invested in through its $1.2 billion IFC Global Infrastructure Fund.

According to Kats, 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”. Many of the private companies that would have been in a position to invest in the sector before have been affected by the corruption scandal.

The same applies to Turkey, a market that has shown great potential and attracted significant foreign investment, but at the same time is dealing with issues such as a government that’s becoming more authoritarian and an increasing number of terrorist attacks.

“Turkey has both an advantage and disadvantage,” Kats observed. “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 discovered a host of potential challenges when it zoomed in on Gama Enerji, a potential investment target. Despite the political instability, however, Kats and his team proceeded with the investment because of the power sector’s characteristics: well developed, it had 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 said.

IFC Asset Management has already realised a partial exit within 12 months of its initial investment, testimony that its thesis has been validated, according to Kats.

“So I think it goes back to my point that it's the company that matters, not the country.”

An extended version of this article appears in the July/August print edition of Infrastructure Investor as part of our InFocus section dedicated to risk.