Asia’s infrastructure markets should welcome investor flows from outside the region, even if there is adequate capital to supply their needs within it, according to the world’s fourth largest infrastructure asset owner.
“The overseas infrastructure investment market is underweight Asia compared to its importance and investment needs,” Yves Meyer-Bülow, head of infrastructure funds and co-investments at Allianz Capital Partners (ACP), told AsianInvestor. “The reasons vary from country to country. In many cases, these are export powerhouses that are capital-rich. However, foreign capital can also provide expertise.”
Allianz is the fourth largest equity investor of infrastructure among the world’s asset owners, according to Infrastructure Investor. Currently, it has more than €7bn ($8.1 billion) assets under management (AUM) in infrastructure funds and co-investments. In Asia’s infrastructure market, the majority of this is deployed in developed Asia, including Japan, South Korea, Taiwan, Hong Kong, Singapore, Australia, and New Zealand.
Allianz’s infrastructure funds and co-investments portfolio splits about one third by Europe, North America, and the rest of the world. Developed and developing Asia represent more than half of the rest of the global allocation.
Traditionally a direct investor in infrastructure in Europe, Allianz has increased its Asian allocations via funds and co-investments – the latter due to the cost savings they provide over fund investments, and the speed they provide for accessing focus areas.
“Co-investments help improve returns by avoiding fee leakage – since gross returns can become net returns,” said Meyer-Bülow.
“They are also useful to steer our portfolio to interesting themes and help to accelerate deployment, because with co-investments, capital is typically called up front.”
Secondary investments – where Allianz buys secondary Limited Partnership (LP) stakes in private funds, or where General Partners (GPs) roll over investments in a single asset or part of a private portfolio to lengthen duration – are also a favoured investment route in Europe and North America, but remain rarer in Asia, he said.
ACP’s major infrastructure investment themes include energy transition and digital infrastructure, which comprises data centres, fibre networks, and wireless communication towers. Meyer-Bülow said these sectors have seen significant investor flows in Asia Pacific (Apac) over the last five years, but much more investment was needed to make networks future-proof. He pointed to Australia, Japan, India, and Indonesia as examples.
Several of Asia’s developing markets provide the benefits of infrastructure contracts that price in dollars. For instance, certain energy transition and digital infrastructure sub-sectors can provide such opportunities, he noted.
“These are useful de-risking tools,” said Meyer-Bülow, pointing to hyperscale data centres as an example, where contracts can be executed with large US-based technology firms in dollars.
Nevertheless, hard-currency contracts for infrastructure investments in the region are not essential. In cases where they are not available, ACP would typically seek an inflation-indexed tariff to hedge the exposure. “If the currency depreciates, then inflation will pick up, which can help offset the effect of the depreciation when measured in hard currencies,” he said.
ACP’s indirect infrastructure portfolio in the country is more weighted to private sector counterparties in areas such as logistics, data centres, and commercial solar.
LEADING THE WAY
“We are indirectly invested across infrastructure sectors in Australia, including digital infrastructure, energy, and environmental,” Meyer-Bülow said.
“Australia is a great market and very large. But at the same time, it is highly competitive. The large superannuation funds have a big appetite, so the currency adjusted return is not always compelling,” he added.
As an example of energy transition opportunities, Meyer-Bülow pointed to Western Australia, which enjoys unique wind and solar resources, and Australia’s nascent Power-to-X sector, whereby power from renewables is converted to a green fuel or feedstock like hydrogen or ammonia that can then be stored, transported, and used.
To achieve a portfolio-wide net-zero target by 2050, Allianz has set a number of interim targets. By 2025, all real estate invested in by Allianz will be in line with scientifically based 1.5-degree pathways in terms of total emissions, as per the Paris climate agreement. These, along with all equities and corporate bonds, will be reviewed for their compatibility with the 1.5-degree target annually. Allianz is one of the founding members of the UN-convened Net-Zero Asset Owner Alliance.