Asia driving record rise in infrastructure flows

The volume of Asian infrastructure deals has hit record levels and is set to grow yet further with the advent of the Asian Infrastructure Investment Bank and other similar projects.
Asia driving record rise in infrastructure flows

Infrastructure investment in Asia is outpacing that in the rest of the world – and looks set to accelerate further given the rising focus on this area by both investors and governments in the region.

While the global total of infrastructure deals slowed in the second quarter of 2016 from the first, the amount invested has risen, most notably in Asia, which accounted for 51% of the total, according to data provider Preqin. 

A total of 57 infrastructure deals worth an all-time quarterly high of $36 billion were done in Asia in Q2, double the previous peak of $18 billion in Q1, according to Preqin. The Q2 figure for Europe was $17 billion and for North America $14 billion.

Six of the largest 10 infrastructure deals announced globally in Q2 were in Asia, with a heavy focus on natural resources and railways. The biggest transaction in the quarter was the April acquisition of the Tuban Refinery Plant in Indonesia for $13 billion by Indonesian energy company Pertamina and Russia’s Rosneft.

Tom Carr, Preqin’s head of real assets research, said the increased level of capital invested by infrastructure fund managers this quarter reflected the rising value of these assets.

And Asia will see a lot more growth in infrastructure investment, said Anthony Fasso, Hong Kong-based chief executive for international at AMP Capital Investors. 

“The advent of the Asian Infrastructure Investment Bank [AIIB] project means there’s going to be a huge focus on Asian infrastructure to achieve the objectives of the ‘one belt one road’ initiative,” said Fasso. Beijing's 'one belt, one road' initiative is designed to promote Chinese investment in trading partners with a view to solving the problem of domestic industrial overcapacity.

Asia is playing catch-up, he added, having had comparatively little infrastructure development compared to the western world over the past 200 years. “That’s being accelerated by the clear mandate of the [China-backed] AIIB, which is to build all this connectivity between Europe and Africa.”

Fasso said he was seeing a big uptick in interest this year by Asian limited partners in global infrastructure. Asian investors are now leading investment in global and regional infrastructure mandates, he added.

He said demand for infrastructure equity and debt fund investments was strongest from Korea and Japan, typically among insurers and pension plans – with Taiwan and Hong Kong also driving demand. Singapore’s sovereign entities are much more focused on direct transactions, noted Fasso.

Moreover, several new state funds – such as in India, Indonesia and Thailand – have been set up this year dedicated to improving domestic infrastructure. And other countries are also putting a bigger focus on this area – the Philippines being a clear example. 

Fasso said the preference in Asia was for brownfield projects – those already some way into their development – which can help pension plans and insurers to match their liabilities. New projects are not cashflow-accretive for some years, hence the early investors into those projects are multilateral agencies, he added.

And while there’s always plenty of global interest in the big-ticket trophy infrastructure assets, such as electricity distribution networks, he said, it could take 12-18 months to set up a syndicate to do those big deals, with no guarantee of a successful bid.

"When you are trying to put $5-10 billion to work, and each deal takes time to arrange, our preference, and where we are seeing plenty of deals, is around the $200 million to $500 million range,” Fasso noted. “There’s less price tension there compared to the massive deals, where some of the big GPs and some of the sovereign-type investors are hunting.

“If you are bidding for a major port for $5 billion, if you get it, fantastic, but if you’re on the other side of that, you’ve missed out on deploying that $5 billion,” he said.

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