China Everbright Limited (CEL) is eager to take full advantage of a rising global appetite for infrastructure investing.
The Hong Kong investment arm of China Everbright Group, a mainland financial services group, intends to bolster its first overseas infrastructure fund from its first close of $300 million in July to $1 billion by seeking Chinese insurance company assets and by reaching out to European investors too.
The company also intends to inject a new Hong Kong telecom asset into the fund, said Daniel Hu, managing director of the newly closed fund. Plus it could launch a “belt road on the air” fund, chief executive Chen Shuang said at CEL’s first-half results press conference in Hong Kong at the end last month.
Chen didn’t give further details but Hu told AsianInvestor the company is seeking out projects along the Belt and Road route. He noted that it is looking at projects together with strategic Chinese enterprises or local asset managers such as those in Indonesia, who normally have better industry or local knowledge.
CEL originally signed an agreement in April 2016 to acquire the Tirana International Airport in southeastern European country Albania. The assets were transferred to its new infrastructure fund in July.
Following the Tirana airport, the Hong Kong company has invested into a telecommunications company in its home city, completing the transaction for an undisclosed sum in early February. CEL plans to inject the telecom company into its new fund too, Hu said.
He noted that there are two parts in the telecom company investment, one of which is in the process of an initial public offering (IPO) application in Hong Kong. “We’ll inject it later when the listing is done.”
To support the funding of more assets, the offshore fund intends gain capital from Chinese investors in its next rounds of fund-raising. However, Hu said interest from European investors has led it to consider target them for money further down the road.
CEL’s fund is also looking to invest into assets in sectors such as telecoms, transportation and environmental protection such as sewage treatment plants, mostly in Europe and some in Asia.
There are project opportunities in the US too, but this is more difficult due to the need to gain approval by the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee authorized to review foreign acquisitions in the US. The risk embodied by needing CFIUS approval has meant “we are comparatively less active there,” Hu said.
Hu admitted the competition for infrastructure deals is fierce. Investors are hunting for yield amid the protracted period of low interest rate environment, and many are looking at infrastructure assets. To win deals from the competition, CEL’s strategy is not to chase the large, trophy assets.
“We turn to mid-market deals and those located in peripheral areas, such as the Tirana Airport. In that case, we were even able to execute the deal on a bilateral basis, avoiding the bidding situation,” he said.
“We also look at ferry operations, which is usually not on the radar of core or core plus infrastructure funds."
While many infrastructure projects exist in Asia, the risks of investing into them are higher than those in developed markets, Hu said.
One reason is that a lot of them are green-field, and the time and cost of building them can often vary from initial estimates, which affects the cost of future operations. Other risks include technology changing during the course of the construction, making the project less competitive when it’s complete.
Plus there is the risk of exchange rates between Asian currencies and US dollar fluctuating. CEL’s fund is denominated in US dollars.
“Given that, we would demand higher expected returns for Asian projects for at least mid-to-high teens, to offset the perceived higher risk. If a project’s return is lower than that, we would probably give it up,” Hu said.
For example, return of solar power projects is easy to predict, so many pension funds in Europe like to invest in the area, which has pushed up the asset price a lot, with many only offering annual return of 5%-6% in OECD countries. “You wouldn’t invest in a green field power project with that level of expected return,” Hu said.
It’s hard to mitigate away the risk of Asian projects completely. In some cases, the counterparty, be it the government or from the private sector, may offer some form of undertaking (for example, a take-or-pay contract) to enhance the attractiveness of the asset.
“We would assess carefully the credit risk of the counterparty,” said Hu. “However, normally, we prefer not to go into such arrangements. We like projects with good fundamentals that can sustain themselves.”