Big Korean institutions have underlined the growing focus on real assets among investors in Asia, as asset owners and managers in the region ramp up their activity in infrastructure and property.
Asian asset owners are now leading investment in global and regional infrastructure mandates, said Anthony Fasso, Hong Kong-based chief executive for international at Australia’s AMP Capital.
Seoul-based pensions, sovereign funds and insurers are planning to expand their offshore infrastructure portfolios in 2017, according to survey findings released this week. Three-quarters also said they would step up their overseas real estate buying next year.
Chief investment officers of the country’s top 20 institutional investors were quizzed on their plans in respect of infrastructure and property investment. The poll was conducted by Korea Economic Daily at the 2016 Ask Global Real Estate & Infrastructure Summit in Seoul on October 20.
Respondents included the National Pension Service (NPS), Korea Investment Corporation (KIC), Teachers’ Pension and Kyobo Life. They all said they would increase their offshore infrastructure investment in 2017, citing high risk-adjusted returns compared to other asset types and steady cash flows from infrastructure projects.
Kang Shin-woo (pictured left), KIC’s chief investment officer, reportedly said: “We need to increase infrastructure investment to balance our alternative investment portfolio. In particular, infrastructure assets are expected to generate inflation-linked cash flows, so it provides a good hedge against inflation.”
The survey underlined the Asia-wide trend for institutions to take on illiquid assets to boost returns. That typically involves private equity, real estate and, increasingly, infrastructure debt as well as equity.
Industry experts have told AsianInvestor that infrastructure investment in Asia is outpacing that elsewhere and that demand for infrastructure equity and debt fund investments was strongest from Korea and Japan, typically among insurers and pension plans.
Hong Kong and Taiwan are also driving demand, while several new state funds – such as in India, Indonesia and Thailand – have been set up this year dedicated to improving domestic infrastructure. The Philippines has also increased its focus on this area in recent years.
In the Korean survey, the US topped the list of favoured regions for infrastructure investment; it was chosen by 17 of the 20 institutions. Europe (nine respondents) and Australia (six) were also favoured.
Among infrastructure assets, renewable energy projects are seen as the most lucrative (14 respondents). Social overhead capital projects – those that provide basic services such as communication, transport and power – were seen as attractive investment targets.
Korean insurers pointed to senior loans as their preferred tranche of infrastructure assets, while NPS preferred the equity tranche and KIC plumped for equity and mezzanine financing. Korea Teachers liked both equity and subordinate tranches.
For Korean insurers, such as Kyobo Life, the upcoming implementation of phase 2 of accounting standard IFRS 4, due to come in by 2020, is forcing them to extend their portfolio duration in line with their liabilities.
While three-quarters of respondents said they would step up their offshore real estate buying next year, some stressed that this would be only be marginal, while others were less keen on property.
Park Min-ho, CIO of Korea Teachers Pension, said the fund would retain its current allocation to real estate because of high valuations amid “overheated market conditions”.
Australia’s Future Fund invests chiefly in infrastructure equity, but managing director David Neal told AsianInvestor he expected the market for infrastructure investment to become broader. He anticipates more types of infrastructure funds becoming available, as managers seek to meet the goals of a growing number of allocators.
Fund house activity
Fund managers confirm investors’ expanding appetite for real assets and are responding accordingly.
Asian investors are increasingly moving into inflation-linked type allocations to infrastructure, timber, commodities, real-return bonds and property, said James Cowan, head of Macquarie’s investor solutions group for the Americas. He told AsianInvestor this was “a massive evolution” among investors.
Having seen comparatively little infrastructure development compared to the western world over the past 200 years, Asia is playing catch up, said AMP Capital’s Fasso (pictured right). “That’s being accelerated by the clear mandate of the [China-backed] Asian Infrastructure Investment Bank, which is to build all this connectivity between Europe and Africa.”
As for asset manager moves in the space, BlackRock is in talks with insurance clients in Singapore on the question of infrastructure debt. It is working with investors in the city-state to build local-currency infrastructure debt mandates.
Concerns about infrastructure vehicles
Interest in real assets may be growing, but there are several issues to address in respect of infrastructure investment, according to research institution Edhec.
Its most recent study of infrastructure investors, published in July, took soundings from 184 institutions, representing some $8 trillion in assets. Eighty percent said the classic closed-end private equity infrastructure fund was outdated and did not add value. This is due to the relatively short-term and high fees associated with such vehicles.
Edhec’s research also shows investors have serious concerns about the transparency of infrastructure investments. Close to half of those polled said they did not trust, or did not know whether they could trust, valuations reported by infrastructure managers.
They also complain that risk metrics are not documented and that valuations are hard to assess, which makes it difficult to measure potential returns.
"Investors need a better understanding of the potential contribution of infrastructure assets to their investment strategy," said Grace Chen, senior relationship manager at Edhec Infrastructure Institute in Singapore.