AIIB seeks to address infra capital shortage
The China-led Asian Infrastructure Investment Bank (AIIB) is finding private investors outside China hard to come by, but will be hoping the recent appointment of a South Korean industry veteran can help change that.
‘Don’ Lee Dong-ik, a former chief investment officer of South Korea’s sovereign wealth fund, took up his new role in early September. His job is to bring in private investors from east Asia—effectively all countries in the region east of central Asia.
As one of AIIB's director general of investment operations, Lee told AsianInvestor his primary task is to raise financing and investments for infrastructure projects in Asia’s emerging markets. He previously served as operations adviser at AIIB since September last year.
Given his background and contacts in South Korea, the hope is presumably that Lee will be able to lure investment from that country’s huge pool of capital.
Korean insurers and pension funds—the likes of National Pension Service and Korea Investment Corporation—are substantial allocators to alternative assets such as real estate, infrastructure and overseas markets. The 42 Korean asset owners represented in AsianInvestor's AI300 had a combined AUM of $2.15 trillion.
AIIB may be based in Beijing, but it is keen to stress that it is a multilateral development bank, like the World Bank-owned International Finance Corporation and Asian Development Bank. It is not a Chinese policy bank, though most of its investments so far have been made by mainland investors, Lee noted. It now has 80 member countries and it acts on their behalf.
Deploying capital
AIIB already has $100 billion in authorised capital and more than $10 billion in paid-in capital, and is busy deploying it, said Lee. However, the bank does not yet have a separate team for fundraising.
He noted that the main target countries for deploying capital at present are the larger emerging markets; the likes of India, Indonesia, Pakistan and Bangladesh. AIIB has two pillars of concentration: transportation and energy (the latter with a focus on renewables).
AIIB has approved 28 projects for a total of a little over $3 billion, said Pang Yee-Ean, also director general of investment operations at AIIB but with a focus on central Asia, at a conference in early September. He was addressing the annual meeting of International Forum of Sovereign Wealth Funds in Kazakhstan.
That is a drop in the ocean compared to the $26 trillion of spending needed on infrastructure in developing Asia Pacific by 2030, according to the Asian Development Bank. Though admittedly it is relatively early days for AIIB.
Pang stressed: “The developing world cannot always depend on governments to fund infrastructure. There are adequate opportunities to structure bankable projects that institutional funds such as sovereign wealth funds can invest in.”
Risk sharing required
Certainly, heavy-hitting investors argue that allocators will continue to steer clear of infrastructure in emerging markets, including projects covered by China’s Belt and Road initiative, unless governments take on more of the risk. Much of the mooted projects are greenfield, and the construction risk and political risk make them unappealing without explicit state support.
There are also other obstacles holding back investment such as long-term currency risks and outdated regulations affecting local institutions, said speakers on a panel in late September at a conference in London. The participants included senior executives from Canada Pension Plan Investment Board, International Finance Corporation and Macquarie.
Another issue cited was a lack of familiarity with emerging Asia among many Western investors.
However, AIIB is working on providing more attractive routes for asset owners to allocate to infrastructure in emerging markets. For instance, the bank is planning a new scheme that allows institutional investors to take up its projects’ debt once they reach the brownfield stage, while recycling the capital back into greenfield projects.
Another example of a recent AIIB initiative is an Indian infrastructure fund, set up in June, in which the bank is the first anchor investor. It has committed $150 million as an equity investment loan to the fund, which is looking to raise a total of $750 million.
Its strategy is to invest in infrastructure platforms and infrastructure service companies with high growth potential that derive their revenues mainly from India. Lee said he could not name the manager of the fund.
Moreover, some investors are optimistic that Belt and Road should benefit sectors beyond infrastructure, such as property and technology, by having a knock-on positive effect on value of assets in the regions affected.