The appetite of life insurers across the world and in Asia for infrastructure investments has only grown since March, despite drops in value of some other illiquid assets like real estate, according to fund managers and rating agencies.
Frank Yuen, a senior analyst at rating agency Moody’s in Hong Kong, said Asian insurers, and especially those in Korea, have favoured infrastructure debt for the past three months. He said the spread of Covid-19 has persuaded asset owners to allocate more to such assets – which are typically government-backed –rather than into high yield and lower-rated investment grade corporate bonds and predicts they will continue to do so going forwards.
“Raising portfolio resilience will be the key objectives for insurers amid the market turbulence and lower-for-longer rates environment,” Yuen told AsianInvestor. “I don’t see many going down the credit curve in bonds for yield enhancement.”
The entirety of the assets raised by private infrastructure funds in the first quarter of 2020 – a total of $591 million – was funnelled into debt funds, according to alternative data provider Preqin. This was up from $550 million in the first quarter of 2019. As of July 16, a total of 19 Asia-based infrastructure funds were collectively seeking $12.7 billion of capital, with 12 expecting to make their first investment in 2020.
But Will Clarke of Preqin in London said that an increasing share of Asian investors’ flows now go to infrastructure investments beyond the region. “In general, we are seeing Asian investors becoming increasingly global,” he told AsianInvestor.
Global infrastructure fund raising has stayed constant despite the challenges posed by Covid 19. On July 16 there were 240 new global infrastructure funds seeking a total of $198 billion, 121 of which were planning to make their first investments in 2020, according to Preqin. This was just 2.5% lower than January, when 253 funds were seeking $203 billion, despite a fall in fund raising in recent months, said Clarke.
“Activity has fallen back in the second quarter, as travel restrictions and investors’ unwillingness to bypass face-to-face meetings has made it difficult for fund managers to secure capital.”
Stuart Mercier, head of China at of Brookfield Asset Management, told AsianInvestor that global insurers have been increasing their allocations to core infrastructure equity and infrastructure debt strategies via funds and mandates since March, and have been funding these positions by selling listed equities and fixed income. He declined to provide the identities of specific insurers or the size of the flows.
DOUBLE DIGIT RETURNS
Global unlisted infrastructure funds have returned 10.6% annualised over the 10 years to December 2019 and 11.7% per year over the five years to then, according to Preqin. Anish Butani, senior director at bfinance in London, added that infrastructure valuations have generally held their value.
Toll road valuations, for instance, have dropped heavily, while valuations of data centres have risen. That has fuelled demand from asset owners, particularly fixed income-focused insurers.
“In spite of FX volatility during the Covid pandemic, appetite for alternative assets such as infrastructure remains unabated, with the appeal of private asset classes – particularly yield and insulation from daily market movements – continuing to endure,” said Butani.
He said that most lower-risk infrastructure assets globally, including public-private partnership projects, utilities and renewables have remained resilient during the pandemic, and not defaulted on interest payments or withheld dividend payments.
This stands in contrast to real estate. Other managers said that insurers had faced heavy losses in other illiquid sectors such as real estate as a result of Covid-19. The FTSE EPRA/Nareit Global Retail Real Estate Index fell 36.8% in the first half of 2020.
“Insurers had done a lot of lending into the commercial and retail real estate sectors and are now having to work out what these loans are really worth,” said Remmert Koekkoek, head of insurance and pension solutions at Robeco in Rotterdam.
Indeed, Ed Collinge, global head of insurance strategy at Robeco, argued that insurers should avoid illiquid assets now given that wider spreads have been available in fixed income since early March.
“Now that spreads have moved out, public markets become more attractive,” he told AsianInvestor. “They can now get that yield from higher rated and more liquid investment grade bonds’ they don’t need to actively invest in illiquidity.”
Others take a different view.
Andries Hoekema, London-based global head of insurance segment at HSBC Global Asset Management, said that his firm was preparing several new private debt fund launches, partly in response to appetite from insurers, although he declined to give details.
“There is no sign that the hunt for illiquidity premium has come to a halt,” he noted.