Investors wary of Belt and Road project risk

China's Asia-to-Europe infrastructure initiative has seen little involvement by asset owners. Better inducements may be necessary, including stronger downside risk protection.
Investors wary of Belt and Road project risk

Institutional investors' participation in China’s ‘belt and road Asia-to-Europe infrastructure scheme has been limited, but better downside risk protection would give them more confidence, said industry observers.

Many asset owners in Greater China are on the lookout for belt-and-road deals, but have been cautious because of the perceived high risk involved, particularly on the political side, said Janet Li, director of investments for Greater China at consultancy Willis Towers Watson.

Projects with the same target return in the US, for example, are likely to be much less risky than those in belt-and-road regions, Li told AsianInvestor. The 'belt and road' envisaged runs from China through central Asia and the Middle East to Europe.

Willis Towers Watson said this week that it had joined the Hong Kong Monetary Authority’s Infrastructure Financing Facilitation Office as a strategic partner, to provide risk management and human capital advice to infrastructure players of the belt-and-road initiative.

Markus Benzler, Zurich-based head of multi-managers for private equity, real estate and private markets at UBS Asset Management, made a similar point to Li's. UBS AM clients tend to focus on established assets, whereas Asian projects are often greenfield developments – where operations are constructed from the ground up – and so are less suitable for their risk/return expectations, Benzler said.  

Indeed, the chief investment officer of a Korean pension fund, told AsianInvestor he was not looking at belt-and-road projects at present, because he was more focused on brownfield projects that have already generated stable cash flows.

Asset owner moves

While many Chinese asset owners have said they would invest in belt-and-road infrastructure projects, only China Investment Corporation has confirmed it has pulled the trigger. The $814 billion sovereign wealth fund has allocated some $10 billion to belt-and-road-related projects, including ports, railways, roads, mining, power grid and oil-and-gas pipelines, a CIC spokesperson told AsianInvestor.

Meanwhile, China's $294 billion National Council for Social Security Fund (NCSSF) has lined up a pipeline of deals in belt-and-road projects, Wang Zhongmin, a vice-chairman of the state pension fund, said in May. But he didn’t reveal when the investments would start or provide any other details, apart from to say: “It will be a gradual process.”

Other institutions are certainly showing interest. Paul Carrett, group CIO at Hong Kong-based insurer FWD, told AsianInvestor that the macro picture of the belt-and-road initiative was exciting, as it would open up trade routes and make economies more efficient and hopefully more prosperous.

Carrett said he would be interested in the opportunities created by second-order effects. For instance, building a new railway may increase the financial value of a port or piece of real estate along the line of the railway. 

Mitigating risks

Willis Towers Watson’s Li expects more belt-and-road investment opportunities to emerge, but she said she hoped general partners in the deals (such as private equity firms) would offer better risk management methods or contract clauses to help mitigate the downside risks for investors.

The Manila-based Asian Development Bank has made a similar point about infrastructure projects in Asia in general. To attract more capital from institutional investors, said ADB, better inducements are needed, such as credit enhancements, minimum guarantees and brownfield project offerings. 

The multinational development institution has estimated that emerging Asia will require $26 trillion of infrastructure investment from 2016 to 2030, for which it will need much greater participation from the private sector, including institutional investors.

For more insights on the investment outlook for China, attend AsianInvestor's 4th China Global Investment Forum in Beijing on September 21. For more details, contact Terry Rayner by email or on +852 3175 1963.

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