AsianInvestor spoke to Brandon Prater, co-head of infrastructure at Partners Group, about how the private markets manager invests in infrastructure in emerging markets and Asia in particular. The Swiss firm, with $55 billion under management, tends to focus on renewable energy in the region, notes Prater, who also explains why Partners is so bullish on India.
The firm is looking to raise at least $1 billion each for two global infrastructure funds, as reported last week. The full Q&A with Prater appeared in the September issue of AsianInvestor magazine.
Q To what extent do you invest in emerging markets?
Counterparty risk is a key factor for infrastructure investments, so when considering investments in emerging markets you often have to consider higher counterparty risk in areas such as regulation, taxes, public markets and commercial law.
For example, in the public-private partnership [PPP] market in Europe, since the mid-2000s returns have been relatively low because the counterparty risk is considered very low. When considering similar investments with less strong counterparties, we would seek higher returns – say 2-4% higher.
Q What sort of deals are you doing in Asia?
We’re very involved in the renewable energy space in Asia. We have invested in a large solar platform in Japan – Nippon Renewable Energy [NRE] – and are hoping to build a platform that will generate 300-400MW of solar energy.
[NRE in January 2014 said it had raised Y26.1 billion ($250 million) in equity capital for the project from Partners Group and other firms.]
Nippon Renewables is completing a number of the first-stage projects and has a large pipeline of projects that are in process of construction. This reflects the massive energy infrastructure shift [away from nuclear] in Japan post-Fukushima [the nuclear disaster caused by a tidal wave in March 2011].
We have also invested in solar energy in more emerging parts of Asia, for example in Thailand and the Philippines. Most recently we announced plans to build a solar power platform in Taiwan, with long-term support from the government underpinned by a switch in energy, similar to Japan.
[Partners Group agreed in July to invest $200 million in the Taiwanese platform to develop up to 550 megawatts of solar plants. Taipei-based Cathay Life Insurance is also acquiring a minority stake in the platform.]
Q There is a huge need for infrastructure investment in countries such as India, Indonesia, Thailand and the Philippines. Are you looking at those markets, apart from at renewables?
Renewable energy has been the most accessible sector for us in emerging markets. In some of the countries you mention, counterparty risk is really critical. So in certain sectors, there might not be sufficient depth of counterparty experience for us to find a partner to help build a railroad network or an LNG [liquefied natural gas] terminal.
But renewable energy is quite scalable, and something where we bring a lot of construction and operating experience to the table.
Renewable energy is almost always subsidised, so you have to take a view on whether the government that’s providing the subsidy is going to be there for the long term or if they might change the rules of the game. Offsetting this risk is the fact that in some countries, like India, renewable energy is produced at near-parity with thermal (conventional) energy
We made an early investment in Thailand in the wind sector in 2011 – we provided capital for one of the country’s first utility-scale wind farms [built to generate 180 megawatts of power]. We found [the regulator] to be very supportive and transparent; and it was the same in Japan.
However, there are certain countries in Asia and globally where regulation and government support of infrastructure is less developed, and we have to judge how stable the regulation or support is. Infrastructure is affected by government policy or regulation and that’s something you can’t really structure around.
Q Can you give an example of how a change in regulation has caused an issue?
Yes. In Italy we invested in solar energy in 2010, and the government subsequently decided to change some of the support mechanisms and a lot of the ways that renewable energy interfaced with the power sector. That had a somewhat negative impact on our investment. Luckily we had structured the investment to reduce the impact of a change like this on our equity returns.
Q Is India doing the right thing to attract foreign capital and maintain reform momentum?
We are super-encouraged by what’s happening in India. [Prime Minister Narendra] Modi came from a state [Gujarat] that was one of the first adopters of renewable energy support.
Renewable energy, such as solar, can be built much faster and doesn’t rely on imported coal or gas. The current government recognises the benefits of that and the fact that renewable energy will make their goal of providing more reliable power more achievable.
For that reason, the subsidies needed to build renewable energy are much lower than in other countries. They’ve done all they can to promote use of land, which is really critical. And they’ve committed to put a lot of investment into the grid. There’s going to be a green corridor moving energy from certain parts of the country to the main population centres.
Q Can you give me a broad comment on your approach to choosing GPs to invest in – why and how you would do so?
My focus is really on the direct investment side. However, we might look to allocate to a manager that covers a sector that we wouldn’t normally invest in for our investors. So if a firm had an attractive, niche strategy, such as emerging-market energy, or they’re in a market where we’re trying to get more exposure, then we might back them.
We would look to develop a relationship with an investor like that that provides a good opportunity to invest alongside them as well.
[At Partners Group,] both the fund-investing side and the direct investing side of the business have grown, but the latter has grown a lot more quickly.