Drawn by stable returns, private capital is beginning to play a profound and positive role in the delivery of world-class infrastructure. And it couldn't come at a better time with Asia's developing countries needing to invest US$1.7 trillion a year in infrastructure until at least 2030.(1)
From private equity to asset managers and insurers, many are now piling into the infrastructure industry, driven by low interest rates and high equity prices.
“The appetite for private investment in infrastructure has never been stronger,” says PwC in its report “Global Infrastructure Investment”.(2)
Private equity firms have collectively raised US$68.2 billion(3) for infrastructure in the first three quarters of 2018, already surpassing the US$66.2 billion they amassed in all of 2016, according to data from Preqin. Meanwhile, insurer Manulife(4) recently closed a US$2 billion infrastructure fund, and Eastspring Investments(5), the Asian asset management business of Prudential, has pledged US$500 million alongside the International Finance Corporation for infrastructure projects in emerging markets.
“Right now, there are record amounts of capital being raised for infrastructure,” says Mark Rathbone, PwC’s Asia Pacific Capital Projects and Infrastructure Leader. “But the funds are being crowded out of Europe and the US due to the huge amount of competition for a limited number of assets. This is leading to a lot of dry powder just sitting in these funds unable to find an investments and pushing them into more emerging market strategies, which tend to carry higher returns.”
Consulting firm Cambridge Associates compared private infrastructure funds to private natural resources, real estate and private equity benchmarks and found that the infrastructure funds produced the highest returns on a one-year basis. Out of the four benchmarks, infrastructure had the lowest volatility of rolling returns over a ten-year period(6).
Innovative structures such as the first infrastructure project finance securitisation in Asia are one of the biggest drivers to attracting private investment. The infrastructure take-out facility designed and structured by Singapore's Clifford Capital raised US$458 million consisting of a portfolio of project and infrastructure loans across 16 countries and 8 industry sub-sectors.(7)
The deal for Clifford Capital “is interesting because it’s a way to recycle capital,” says Kelvin Wong, Executive Director, Project Finance at DBS. The deal allows “banks to then use that capital to invest in new projects. Whereas previously when a project is funded through loans and will then have to refinance itself, with this deal it creates a portfolio effect. You put different project loans into the vehicle from which notes are issued.”
Strong demand for Clifford Capital’s project finance securitisation was seen from a variety of institutional investors including insurance companies, pension funds, endowment funds and specialised asset managers.
The US$2 billion project bond for Indonesian power producer Paiton Energy earlier this year was another landmark deal and is said to be the largest rated international bond for an infrastructure project in Asia since 2000. Orders for the bond swelled to US$9 billion, with more than 50% of investors originating from outside of Asia, demonstrating the global demand for the debt.
Green Bonds are another area that is receiving a lot of attention, especially after the Paris Climate Agreement was signed in 2015.
“What we’re observing is that there is a halo effect around green or sustainable projects,” says PwC’s Rathbone. “There are now real policies around growing the sustainability footprint. Businesses are looking at their networks and supply chains to make sure each part follows environmental guidelines. This means that companies are trying to build projects that involve green bond financing.”
Bank of America Merrill Lynch estimates that around US$600 billion of Green Bonds(8) from Asian issuers could be on its way. Analysts estimate that by 2020, China will have issued US$55 billion of green bonds per year, Japan and India US$15 billion each and Australia and South Korea US$10 billion each.
While the overall picture is positive, not all infrastructure investments are necessarily appropriate for institutional investment.
One of the barriers to entry is that information about projects and their risks is not shared efficiently, according to the Asian Development Bank. In addition, about 70% of the pipeline(9) now available to equity investors is in greenfield projects, which some investors view as much riskier than brownfield projects with demonstrated returns.
“Inadequate project preparation, poor regulatory frameworks and inefficient pipeline management can be some of the challenges that developing countries in Asia face,” says PwC’s Rathbone. “For projects to be procured in a transparent fashion, they’ve got to be based on precedents in terms of contract structure and have a fair risk allocation between public and private sectors, which are basic factors that would attract private capital.”
Many long-term financial institutions around the world also hold back from investing in developing countries because of fears of unmanageable political risk. But a 16-strong group chaired by Tharman Shanmugaratnam, Singapore's Deputy Prime Minister & Coordinating Minister for Economic and Social Policies, recommends expanding political risk insurance already covering areas of lending by the World Bank and affiliated agencies.(10)
The “plan will propose setting principles for emerging market investments in fields ranging from environment and governance standards to procurement and debt sustainability,” says David Marsh, Chairman of Official Monetary and Financial Institutions Forum.
To further encourage private investment, Singapore is developing usable benchmarks(11) for infrastructure debt and equity instruments, so that investors can compare the returns against other asset classes.
Innovative deals such as Clifford Capital’s securitisation of project finance loans and Paiton Energy’s Project Bond, demonstrate that there is a growing appetite for infrastructure investment among private investors, charged by the efforts of Singapore’s government. With certain Southeast Asian countries facing high public debt with little willingness to increase taxes, the private sector is definitely a welcome entrant to help bridge the infrastructure gap.
More from this series
(1) Ra, Sungsup, and Zhigang Li “Closing the Financing Gap in Asian Infrastructure”, ADB South Asia Working Paper Series, no. 57, June, 2018, www.adb.org/sites/default/files/publication/431261/swp-057-financing-gap-asian-infrastructure.pdf
(2) Rose, Andy “Global Infrastructure Investment”, 2017, www.pwc.com/gx/en/industries/assets/pwc-giia-global-infrastructure-investment-2017-web.pdf
(3) Gottfried, Miriam “Investment in Infrastructure Is Booming”, Oct. 2018, www.wsj.com/articles/investment-in-infrastructure-is-booming-despite-lack-of-progress-on-trumps-pledges-1538920801
(4) “$2 billion John Hancock Infrastructure Fund Closes”, July 2018, www.manulife.com/Master-Article-Detail?content_id=a0Qf200000Jq6kPEAR&ocmsLang=en_US
(5) “IFC Raises $500 million from Prudential’s Eastspring for Infrastructure in Emerging Markets”, June, 2017 www.prudential.co.uk/news/news-releases/2017/28-06-2017
(6) Rosenbaum, Kevin and Indradoot Dhar “Digging In: Assessing The Private Infrastructure Opportunity Today”, June, 2017, www.cambridgeassociates.com/wp-content/uploads/2018/04/Digging-In-Assessing-the-Private-Infrastructure-Opportunity-Today.pdf?mod=article_inline
(7) “Inaugural Infrastructure Project Finance Securitisation in Asia”, July, 2018, www.cliffordcap.sg/sites/default/files/20180725%20Press%20Release%20-%20TOF.pdf
(8) Rust, Susanna, “Bank Analysts Estimate $600 billion of Green Bonds from Asia by 2023”, May, 2018, www.ipe.com/news/asset-allocation/bank-analysts-estimate-600bn-of-green-bonds-from-asia-by-2023/www.ipe.com/news/asset-allocation/bank-analysts-estimate-600bn-of-green-bonds-from-asia-by-2023/10024890.fullarticle
(9) Ra, Sungsup, and Zhigang Li “Closing the Financing Gap in Asian Infrastructure”, ADB South Asia Working Paper Series, no. 57, June, 2018, www.adb.org/sites/default/files/publication/431261/swp-057-financing-gap-asian-infrastructure.pdf
(10) Marsh, David “Pension Funds for Infrastructure”, Aug, 2018, www.omfif.org/analysis/commentary/2018/august/pension-funds-for-infrastructure/
(11) Lee, Meixian, “Tharman Unveils 3 Initiatives to Draw Institutions to Infrastructure”, 2015, www.mas.gov.sg/~/media/MAS_Newsletter/SIFC%2016112015/Tharman%20unveils%203%20initiatives%20to%20draw%20institutions%20to%20infrastructure%20The%20Business%20Times%2021%20October%202015
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