Experts expressed a note of caution for those hoping to use emerging market investments as a performance booster for their infrastructure portfolio at Infrastructure Investor 's Emerging Markets Forum in Berlin today.
“The biggest reason for investing in emerging markets is not returns,” said Gautam Bandhari, a partner at I Squared Capital. “It's diversification. And it's not possible to achieve if you have a very narrowly focused emerging markets fund.”
Similarly, Dominik von-Scheven, a vice-president at Deutsche Bank Private Equity, said gaining exposure to emerging markets did not have to become the lot of every investor. “You don't have to invest in emerging markets. It depends on your risk/return profile. But I think in the energy infrastructure sector it makes sense. It can potentially give you access to the region's enormous growth.”
A poll conducted with the 200+ delegates present in the room showed that 46 percent expected emerging market assets to provide a premium of 6 to 10 percent compared to similar investments in Western Europe or the US.
Panellists sought to bring nuance to this perception. “It's not realistic to expect a fully contracted asset in emerging markets will generate a 5 or 6 percent premium on the European or American equivalent,” said Dmitriy Antropov, a senior vice-president at Partners Group. “To capture those premiums you need to move to niches.”
In recent years, this hunt for returns had not been helped by significant flows of capital to emerging markets, said Bandhari. With return expectations down in the developed world, investors were plugging increasing amounts of capital in developing nations, bringing performance targets down in these regions as well.
“What you need is a good crisis and then you can find some good assets,” he noted, adding that such cyclicality made it “very hard” to follow an isolated strategy. “It's easier if you have a wider remit.”
As a counterpoint, Antropov minimised some of the risks most often associated with developing nations. “What kills emerging market deals is not regulatory or political risk. It's currency or it's a [bad] exit.”
Von-Scheven recognised that 5 or 6 percent return premiums were never to be taken for granted. Having scanned nearly every emerging market fund, he argued that it was difficult for these to generate such value, hinting that sometimes North American, energy-focused vehicles could perform just as well.
“This is why we tend to go direct or choose co-investments versus funds. Our job is to find the best partners in a given market, to try and invest in a sector that provides a prosperous drive for the future.”