FWD Group is looking out for potential infrastructure investing opportunities and could ask external managers to handle investments on its behalf. It is also interested in Asian greenfield projects, in large part because the region's brownfield investments are becoming too crowded, said the Hong Kong-based insurer's chief investment officer.
Paul Carrett told AsianInvestor that FWD is thinking of following advice from the Asian Infrastructure Investment Bank (AIIB), which has discussed a need for institutional investors to be lean and outsource part of their infrastructure investing process.
Although direct investing was more desireable across assets, he said it's generally easier to use external managers when investing in the infrastructure sector.
“We are doing this for property [investment]…Are we doing this in infrastructure [investment]? Today, we are not. Will we [do it] when the right deal comes along? Absolutely,” Carrett told AsianInvestor on the sidelines of the FT-AIIB Summit on Wednesday (November 1).
Carrett (pictured below) admitted that the insurer, which has over $24.4 billion in assets according to its own figures, does not have any immediate infrastructure investments awaiting sign-off.
“There are a number of big [fund managers] that have very large investment teams looking solely into infrastructure debts and equities, and so the easiest thing to do is trying to give money to them to manage,” he said.
He mentioned that example organisations with a strong focus on infrastructure investing include Macquarie Infrastructure and Real Assets, Deutsche Asset Management and BlackRock.
Infrastructure investment involves a high level of expertise from engineers and lawyers, and FWD does not have an internal team that is solely focused on infrastructure yet, Carrett added.
He declined to specify the level of yield that he deemed attractive for participating in infrastructure investments, saying that returns differ dramatcially across different project types and countries.
Funding gap remains
In Asia, about 70% of the infrastructure developments are financed by governments. The region requires $26 trillion to meet the current demand for new infrastructure between 2016 and 2030, while institutional investors are expected to have $106 trillion under management by 2030, according to AIIB.
The annual infrastructure funding gap is $667 billion. There is clearly a big need to mobilise private capital to help finance Asia’s daunting funding gap in infrastructure, the bank said.
Colin Chen, deputy general manager in the structured finance department of Asian investment banking at Bank of Tokyo-Mitsubishi UFJ, told the audience at the summit that he hopes long term investors can play a more active role.
This is a particularly pressing concern because global banks are facing more stringent capital rules under the Basel III accord, which makes infrastructure lending less appealing. The accord is designed to prevent systemic risk in the banking system. Its intention is not to deter infrastructure investing, but the rules do make some infrastructure projects less bankable, Chen said.
“It does make long-term infrastructure financing more expensive for the banks…it opens up the market to other institutional investors which are not governed by Basel III, [like] insurance companies, private equity funds,” he said.
A combination of long term capital from institutional investors and shorter term financing from banks will hopefully help to close the funding gap, Chen added.
Going into greenfield
Like many other institutional investors, FWD has shown little interest in infrastructure deals in Asia to date. But this could be set to change.
Carrett noted that most of the region's major infrastructure opportunities sit with greenfield developments, where operations are constructed from the ground up and therefore face a much wider variety of risks than existing facilities, commonly known as brownfield projects.
Such risks, to name a few, include a relative uncertainty in the continuation of government policies in developing countries over long periods, and project development risks that may arise when seeking approval from government for land plots, legal risks, operational and maintenance risks, foreign exchange rate risks.
Institutional investors generally want to be assured they will enjoy good returns from infrastructure projects over long periods, and prefer to do so with brownfield projects in developed markets like the US, Europe and Australia, said Carrett. He noted that greenfield projects are different animals from brownfields, and require very different skill sets to examine them.
However, Carrett believes that investment opportunities in greenfield projects exist in Asia. He noted that the region's brownfield projects have become extremely popular and therefore expensive. As a result, he said that he is looking out for greenfield project investment opportunities in the region.
Such projects can benefit from the fact that interest rates are ultra-low and long-term investors theoretically prefer investing into lengthy investment projects.
Carrett noted that greenfield projects dominate the opportunities available in Southeast Asia in particular, and noted that it is frustrating that these projects are not receiving much attention from many institutional investors.
This story has been updated to clarify FWD's views on greenfield infrastructure investing in Asia and its current assets under management.
