The Abu Dhabi Investment Authority (Adia) was ranked as the fourth-largest sovereign wealth fund in the world in 2021 with just around $650 billion in assets - as such it is among the largest institutional investors.
Adia’s Infrastructure Division has a global mandate with a portfolio that spans multiple sectors and geographies. In its 2020 review, the sovereign wealth fund announced that it increased its allocation to the infrastructure asset class from 1-5% to 2-7% of its total portfolio.
Although the portfolio is tilted towards investments in developed markets, Karim Mourad, global head of infrastructure in the real estate & infrastructure department at Adia told AsianInvestor that the fund is increasingly seeking opportunities in emerging economies with strong growth prospects and infrastructure requirements.
“We are purposefully seeking to increase our exposure to certain growing infrastructure sectors such as digital infrastructure via platform investments, and traditional core infrastructure will continue to play an important role for us, as it will for other diversified infrastructure investors,” said Mourad
“The ability of legacy core infrastructure to generate stable, predictable cash flows makes it attractive for Adia’s total portfolio, whereas digital assets can offer rapid organic growth and platform scalability.”
ADIA’S INCREASED INFRA ALLOCATION
Traditional infrastructure sectors like transport and utilities often have a direct link to inflation through concession pricing structures or regulatory constructs and can enable Adia to tap into economic growth in preferred markets, according to Mourad.
“As a result, we would expect traditional infrastructure sectors such as transport and utilities to continue to receive investor focus, especially in an environment where inflation is a concern,” he said.
The Covid-19 pandemic has accelerated digitalisation trends globally, with consumers increasingly comfortable to rely on digital services for both personal and business needs, which Mourad said implies a significant need to densify digital networks.
“Southeast Asian consumers are among the most digitally engaged in the world, and have the opportunity to leapfrog their development by investments in digitally-enabled pathways,” said Mourad.
Infrastructure investments in rapidly growing economies in Asia have proven to be a successful complement and strong diversifier to Adia’s remaining portfolio in mature markets such as North America, Europe and Australia.
Two recent examples of Adia’s Asian digital infrastructure investments include: Adia becoming a minority investor in EdgePoint Infrastructure in 2021, to get exposure to tower market tailwinds prevalent in Indonesia and Malaysia – two of the fastest growing digital economies in Southeast Asia.
In 2020, Adia invested in Digital Fibre Infrastructure Trust in India, which owns Reliance Industries’ Jio fibre-optic network in India.
On more traditional infrastructure in Asia, Adia is an investor in Cube Highways in India and has made a number of platform-style investments that tie into the Energy Transition including ReNew Power, the Greenko Group, and Equis Development.
THE INFRASTRUCTURE AND INFLATION LINK
2022 appears set to be a year of robust global economic growth particularly in the developed world, according to the IMF’s projections of 4.4% GDP growth this year, which is higher than the long run average of 3.4%. There is also the expectation of financial experts that economies will experience elevated levels of inflation.
“Historically, the two main drivers of returns for infrastructure and property are both of those variables,” Daniel McCormack, senior economist at Macquarie Asset Management told AsianInvestor. “For infrastructure, inflation is the more potent driver, and for property its more relative to GDP growth.”
“In regions like Europe and Australia, for many regulated utilities infrastructure such as gas and electricity distribution networks are run on a regulated asset base model, where basically the regulator just gives you a real return on your invested capital, making it a perfect inflation hedge,” he said.
Other regulated utilities may not give the investor the same real return, but the regulation often stipulates that you can increase prices by an amount that is linked with the previous year’s consumer price index (CPI).
“For instance, if the CPI last December went up 5%, you also get a 5% increase in price on that utility —therefore your revenue line basically moves up with inflation,” said McCormack. “Now, the asset is not a perfect inflation hedge because you also must consider your cost line, but it is pretty close.”
Within the infrastructure space there's a disproportionate number of these types of assets where the revenue line is very tightly linked to actual inflation, said McCormack.
“In comparison to listed equities where some of them will have an inflation hedge, if they've got a strong brand, or if they're dominant in their market, or will have some kind of traits which enable them to pass on the inflationary pressures that they experience,” he said.
“But in infrastructure, you just have a huge proportion of the market cap with a much tighter link between inflation and revenue, or inflation and returns and that's what gives the asset class a really good inflation hedge.”
HEADWINDS TO GROWTH
Despite the stage being set for real estate and infrastructure to experience strong growth in 2022, McCormack said that a lower-than-expected outcome for GDP growth could be a major headwind for both of these asset classes, and he could envision three main risks to that may present themselves.
“Number one, I would say is China's housing market, which is experiencing a lot of stress at the moment. I think there is a risk that China's policymakers are a little bit behind the curve in terms of trying stop the decline and getting the sector to bottom out,” he said.
“There is some risk that they're too slow on that front and the sector will continue to spiral down and that sector probably accounts for about 25% of the total Chinese economy. That kind of systemic stress could dent global growth.”
The second possible threat to global GDP could be a new deadly transmissible COVID variant that forces economies to shut down once again. While stating he is not an expert on the disease, McCormack believes this is unlikely due to higher levels of immunisation across the globe and a higher tolerance by people and businesses to lock downs.
The third risk would be an over tightening by central banks on the inflation risk.
“You can see the Federal Reserve is going to tighten really aggressively this year and other central banks are following suit which may end up having a cumulative effect across the developed and emerging world, adding up to a really pronounced tightening of monetary conditions,” said McCormack. “This may cause the global economy to perhaps slow quite dramatically in the second half of the year.”
“We're not expecting any of these things to happen, but I would say these are the three main risks to growth.”