Why one size will not fit all for the growth regions

Investors will require local knowledge and expertise to make the most of the opportunities that growth markets have to offer.

Around the world, the unusual suspects are attracting ever more attention. Infrastructure is central to many governments’ plans to ‘build back better’, and the growth regions of the global south and east provide some of the markets where private capital can go the furthest.

However, these markets are extremely diverse. The opportunities and challenges they present vary not just from continent to continent, but from country to country. Identifying and benefitting from the opportunities that will come when the pandemic does eventually recede will require not just agility but local knowledge. One size does not fit all. Here are some of the highlights from Latin America, Africa and Asia-Pacific.

1Brazil leads Latin opportunities

Latin America’s construction industry is set to return to growth this year after the covid-19 pandemic applied the brakes in 2020. There are particularly attractive opportunities in Chile, Mexico and Peru, though Brazil appears to be leading the pack.

The largest of Latin America’s countries, with a population of around 211 million, Brazil made the welcome announcement this year that it was resuming public auctions in the infrastructure sector. Among the largest projects expected to get back under way were a concession of coastal highways valued north of $550 million and two commuter rail lines valued at around $460 million.

The Brazilian government says there are 172 infrastructure investment projects underway in the country, ranging from airports to mining. Even more are expected.

“Like other governments around the world, Brazil is in a tough fiscal situation and we expect in the coming years there to be continued efforts to privatise utilities,” says Scott Lawrence, managing director and head of infrastructure at CPPIB.

Across the region roads, renewables and telephone infrastructure provide a wealth of opportunities. Individual nations also present their own specific opportunity sets – be that airports in Chile or natural gas pipelines in Peru.

2Africa’s potential is vast

Africa’s infrastructure funding gap is “huge relative to its resources to address this gap”, according to Solomon Quaynor, vice-president of private sector, infrastructure and industrialisation at the African Development Bank. With African governments lacking the fiscal space to pursue public sector infrastructure programmes, the private sector has the chance to step in and provide solutions.

Although Latin America attracted private sector infrastructure investment of around $34 billion annually during the period 2013-18, Africa was averaging only $6 billion. There is no shortage of opportunity, but a lack of early-stage project resources and misconceptions about risk have conspired to limit activity.

“We not only need money,” says Alain Ebobissé, chief executive at Africa50. “We need expertise in project preparation, everything required to bring projects to the bankability stage.”

For all of the perceived risks – be they convertibility risk, contractual sanctity or an illiquid exit market – there are mitigants. Olusola Lawson, co-managing director at AIIM, says he is “starting to see a proliferation of IPOs and strategic sales in addition to financial buyers”. He points to recent examples such as the IPO of Helios Towers Africa.

Where others fear to tread, savvy investors can prosper. Mozambique’s sovereign debt default was widely reported, but the discovery of the second-largest gas reserve on the planet, off the country’s northern coast, is less well known. The continent has many local markets such as this which have been overlooked.

Also overlooked has been private debt investment, which lags a long way behind private equity. Only 13 percent of capital managed by private debt impact investors is allocated to sub-Saharan Africa, whereas private equity investors allocated 29 percent of AUM to the continent, according to a Global Impact Investing Network survey. If debt players can become more involved, then Africa’s small and medium-sized enterprises, which are so in need of financing, can put the wheels in motion.

3Investment trails Asia’s growth

The spending required in Asia-Pacific is eye-watering. Developing Asia will require $26 trillion between 2016 and 2030, according to the Asian Development Bank, if the region is to maintain growth momentum and respond to climate change. The infrastructure investment gap in the region stands at 2.4 percent of projected GDP – or 5 percent when excluding China.

The need for greater investment stems from the region’s strong population growth, with rapid urbanisation compounding the issue. “Over half of Asia’s populations are now living in urban cities and half of the world’s middle class are living in the region,” says Frank Kwok, head of Asia-Pacific at Macquarie Infrastructure and Real Assets.

That makes core infrastructure such as roads and transportation particularly attractive investment opportunities. The energy transition is also a key theme for the region, with China leading the world on solar energy.

China has set a target to be carbon-neutral by 2060. “The investment opportunity in renewable energy is pretty huge,” says Sharad Somani, partner and head of infrastructure at KPMG Asia-Pacific, “and this is also working as an advantage for the emerging countries in Asia-Pacific… It is a compelling case for all utilities to develop as much renewable energy as possible.”

As governments across the region look to build back better through infrastructure investment, the opportunities for private capital are extensive.