Despite widespread expectations that private investors would pour into infrastructure projects to replace capital being withdrawn by banks and goverments, these flows have not materialised.
The World Bank estimated that private infrastructure investment in emerging economies fell by a fifth to $150 billion in 2013 from $186 billion the year before.
Still, asset managers such as Australia’s AMP Capital and US fund house BlackRock are keeping faith with the asset class.
This week AMP converted its flagship open-ended European infrastructure fund into a closed-end global infrastructure fund, while this month BlackRock signed up to the World Bank’s new global infrastructure facility, which launched on October 9.
The platform is intended to facilitate collaboration between public and private partners to prepare and design complex infrastructure projects. The governments of Australia, Japan and Singapore are among those to have signed up.
Meanwhile, new investors in AMP Capital’s converted vehicle will gain access to the existing Strategic Infrastructure Trust of Europe (Site) fund’s $750 million in yield-generating assets. The fund had been set up in 2005 and was nearing the end of the 10-year investment period the firm had recommended.
The firm is targeting $1.25 billion of new commitments for the newly converted global infrastructure fund, which has seen very strong interest across the world, including from Asian investors, said Boe Pahari, manager of the fund.
It has a commitment from UK-based private equity fund of funds firm Pantheon, but Pahari declined to give details of any other investor or how much they are putting in.
Persuading existing investors to support the conversion was a complex and lengthy process, he said. While most voted for the restructuring, some faced difficulty entering a closed-end structure because they are subject to liquidity constraints.
Existing investors benefit from more diversification as new investments are acquired, said Pahari. Inflows will be used to acquire new transportation, communication and utility assets in member countries of the Organisation for Economic Co-operation and Development.
European and US assets will form the bulk of the new investments, said Pahari. Investors are looking for annual returns in the low to mid-teens, he added.
BlackRock also envisages opportunities for private investors.
Traditional sources of investment for infrastructure are shrinking, noted Mark McCombe, global head of institutional client business and chairman of BlackRock Alternative Investors at a recent forum in Hong Kong.
Both banks and governments, notably in developed markets, are having to cut their debt levels in the aftermath of the 2008 financial crisis, and thus have less appetite for such projects.
One reason they have not so far been replaced by private investors is that returns have disappointed, noted McCombe.
Pension and sovereign wealth funds say the political and economic challenges of emerging markets in Asia are not matched by acceptable risk-reward profiles, according to a September report from rating agency Standard & Poor’s.
Moreover, the supply of assets available for private investor participation has been low, noted market players, and there is a long lead-time before assets generate a return.
The likes of Australia and the UK have aggressively sought to divest public assets, said Takajiro Ishikawa, chief operating officer of Mitsubishi Corporation Asset Management. But that has not been the case in many other countries seen as attractive, such as Japan and the US.