The Asian Development Bank intends to launch a co-investment/lending platform in conjunction with institutional investors to boost infrastructure development in the region, according to Michael Barrow, director general of the private sector operations department at the Asian Development Bank (ADB).
“We will work with pension funds and insurance companies that want to lend to infrastructure projects in Asia,” Barrow told the audience of AsianInvestor’s Insurance Investment Forum, during a panel discussing the challenges and opportunities of investing infrastructure.
He added that the multi-lateral bank is currently in talks with various institutional investors, who would co-invest as parallel providers of equity and debt financing alongside the ADB. He noted that the due diligence and research on the potential projects would be done by the Philippines-headquartered development bank.
Co-investing is a strategy under which investors typically purchase stakes directly in portfolio companies alongside their private equity managers.
Since infrastructure investment deals are highly bespoke and a fairly new asset class for many institutional investors in the region outside Australia and New Zealand.
According to alternatives data provider Preqin, 2,378 infrastructure deals worth an aggregate value of $916 billion were completed globally in 2017. The data provider said unlisted infra assets under management hit a record $418 billion at the end of June 2017.
Regional investors are eager to seek qualified partners who can help them structure and monitor such deals in the long term, said Barrow.
Stephen van Vliet, chief investment officer of Prudential Corporation Asia agreed with that view: “Infrastructure investing requires a long-term plan, and should be built up gradually with the right partners,” he said during another panel, that focused on insurers’ demand for alternative investments.
He noted that investors currently find it tough to find assets with an appropriate risk-reward profile to invest into. Partnering up as a co-investor with the ADB can help mitigate some of these issues.
The ADB has previously said it plans to scale up its lending operations by 50% from $14 billion in 2014 to more than $20 billion in 2020, with 70% of this amount going towards infrastructure funding.
The Maninla-based multilateral lender estimates that Asia needs about $1.7 trillion annually in infrastructure spending from 2016 until 2030 to keep pace with climate change and economic growth. Energy and transport account for nearly 90% of the region’s total investment needs.
Traditional infrastructure investments have encompassed areas such as railways, airports, power generation and transmission, telecom towers and ports. But some infrastructure experts believe recent technology trends are opening up new infrastructure opportunities.
The phenomenon of autonomous vehicles will, in the medium term, require road markings and signs that can be reliably read by growing number of autonomous car cameras, said Andy Jones, global listed infrastructure portfolio manager at AMP Capital, in a media release on March 6.
He noted that telecoms infrastructure could also play a big role due to the data generated by driverless cars. “It’s the less glamorous infrastructure that will support the new technology and require investment on a large scale, offering the potential of attractive risk-adjusted returns,” Jones said.
To date, most regional long term institutional investors have shied away from investing in infrastructure: experts have previously told AsianInvestor that even experienced investors typically only allocate a few percentage points of assets to infrastructure, as part of a broader investments to alternatives.
Japan’s Government Pension Investment Fund, the world’s largest pension fund, appointed UK-based Pantheon to run a global infrastructure fund-of-funds mandate in January. Such funds of funds offer an easier point of entry for investors still trying to understand the infrastructure market.
The pension fund’s allocation underlines how keenly large and influential investors in Asia are looking at the infrastructure market to enhance portfolio returns.
Because most infrastructure investments (outside of listed stocks) tend to be long term in nature (ranging up to 20 years or more), yields can range from 100 basis points to 500 basis points over the London Interbank offered rate (Libor), depending on the risk profile of the project, Barrow said at the panel.
SUITABLE STRUCTURES NEEDED
Co-investing into infrastructure has been gaining ground in Asia: Prudential, for instance, recently participated in a co-investing programme in the region.
The ADB’s infrastructure platform will effectively copy many of the elements of a programme announced by the International Finance Corporation (IFC), a member of the World Bank group, in June last year. The IFC signed an agreement with Eastspring Investments to raise $500 million from institutional investors for infrastructure projects in emerging markets.
That programme, known as the managed co-lending portfolio program (MCPP) infrastructure, aims to raise $5 billion from global institutional investors to modernise infrastructure in emerging markets by 2021.
Under the agreement, IFC will originate transactions and provide Eastspring with co-lending opportunities in all deals that fit with Eastspring's investment strategy. The private sector arm of the World Bank also provides a limited first-loss guarantee on the programme’s investments to meet the risk-reward profile that institutional investors require.
“We need to create more structures that can satisfy the insurer or intermediary risk taker’s risk-reward profile, “ said Trevor Persaud, independent consultant and former head of insurance for Asia at Standard Chartered Bank.
Like many other experts have said previously, encouraging more participation in the infrastructure markets also requires deep and well-functioning bond markets, which Asia does not currently possess outside of Japan, Persaud noted.
Paul Carrett, group chief investment officer at FWD Group, also noted that there is a lack of clarity on what the capital charges are when insurance companies invest in private debt instruments that are infra-related.
"The fundamental tension is a lot of these might be great deal and investors might think the instruments have BBB or A-type credit risks. But if it’s unrated, it may well have a very high capital charge,” he said at a panel discussing the challenges of investing for global portfolios.
Overall, he noted that while there has been much talk about infrastructure investments, the reality is that there are very few investible deals in the market.
The biggest challenge, however, might be the perceived risk attached to investing in certain Asian markets.
Pakistan for instance, is ADB’s fourth largest market for infrastructure investing but the perceived risk of investing in that country is extraordinarily high, said ADB’s Barrow. “But we have never lost any money on our investments there, and that market offers a fantastic return on equity.”
The share of non-performing loans on ADB'S infrastructure book in Asia is 0.3%, he said, adding that the bank has funded projects in frontier markets such as Myanmar and Laos, as well as in emerging markets such as Vietnam and Pakistan.