Asian state funds chasing resource assets

Private equity and infrastructure specialists are trying to satisfy sovereign funds' rising demand for energy-related investments.
Asian state funds chasing resource assets

Asian state institutions are increasingly looking to make energy- and resource-related investments, particularly into mid-stream assets and energy infrastructure.

Another area of interest is farmland for crops and livestock production, notes Steve Gross, Hong Kong-based managing director at Macquarie Real Assets and Infrastructure.

Asian governments and state-owned entities are among the fastest-growing sources of capital in the world. They seek diversified, non-correlated, long-term and often inflation-hedging assets, and energy fits the bill nicely. That said, they face big challenges in the form of political opposition and the scarcity of such investments.

With regard to infrastructure, these institutions buy resource assets with a view to leasing, say, fuel storage or rail lines for coal transport to exploration & production or mining companies. Another example in this area would be natural gas processing plants.

All of the above opportunities provide investment exposure to the longer-term thematics in these sectors, and generate a more stable income than the former private-equity-type plays, adds Gross.

In short, the trend is to access top-line revenue of the companies in question, he notes. As opposed, that is, to buying energy stocks (which incorporates equity market risk) or the physical commodities themselves (and the price volatility that comes with them).

Bruce Craven, co-head of Asian commodities distribution at Barclays, makes a similar point: “Traditional project finance is still an option for many companies and one we still offer, but with weaker equity markets and a tendency for companies to avoid dilution, the trend is increasingly to look at alternative financing sources.”  

Often in conjunction with a senior financing solution, and sometimes as an alternative to straight equity, companies are being offered streaming and royalty deals in North America and more recently in Australia, he adds.    

Investors can invest into speciality streaming and royalty companies that diversify risk by investing into a portfolio of assets, notes Craven. He cites entities such as Sandstorm Gold, Silver Wheaton and Franco Nevada.

As for where they are accessing assets, Asian state funds are more likely to source energy deals outside their home region than within it. That’s because these investments tend to be made where resources are, not where the demand is, notes Blair Thomas, chief executive of PE firm EIG Global Energy Partners.

Two of the most active investors in energy and resource assets are the $400 billion China Investment Corporation and South Korea’s $340 billion National Pension Service, with the former a particularly large player.

It’s not surprising it is the bigger entities that are most active, given the amount of financial firepower needed to invest in this sector. As Thomas points out: “To be relevant in energy, a $20 million cheque won’t get you invited to the party.”

*The cover story in the latest issue of AsianInvestor (November 2012) examines Asian state investments in the energy sector.

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