A Closer Look at the Asia Pacific Infrastructure Market
Infrastructure investment is at the heart of economic development: it has been central to Asia’s dramatic growth in recent decades. But despite impressive advances, greater investment is needed. The World Bank estimates that emerging Asia Pacific countries alone needs to invest US$26 trillion from 2016 to 2030—or US$1.7 trillion a year—to maintain its current rate of economic growth.
Funding the Investment Gap
Governments cannot hope to fund the level of infrastructure investment required around the world. The Asian Development Bank estimates that 60% of the investment needed in emerging Asia Pacific before 2030 will have to come from the private sector.2 While banks are important players in infrastructure investment, they are also unable to fill the infrastructure gap. Nor can local bond markets help much, as most are insufficiently developed to meet the complex needs of infrastructure investment. Instead, private debt credit funds are likely to be an increasingly important part of infrastructure investment in the coming decades.
Increasing Demand for Infrastructure Investments
Private money has poured into infrastructure in recent years. Globally, infrastructure funds raised US$65 billion in 2017, compared to US$66 billion in 2016 and US$44 billion in 2015, according to PwC.3 Conversations with our institutional investor clients in Asia Pacific indicated that Asian institutional investors have embraced the investment opportunities available, dedicating a significant portion of funds to their alternatives allocation to infrastructure. Although much Asian investment goes to domestic markets, there has also been significant investment in infrastructure assets in Europe, the Americas and Australia, which act as a hedge to home market investment. At the same time, a number of large global fund managers have increased their Asian footprints, setting up new credit funds with mandates to invest at least partly in infrastructure.
What’s the Appeal?
The characteristics of infrastructure investment and the opportunities available are potentially attractive for many investors. In the continuing low interest rate environment—and against a backdrop of growing volatility in financial markets – infrastructure assets are relatively stable. “Infrastructure is a long-term investment, without the peaks and troughs of the markets,” says Mark Brewer, APAC Head of Alternative Investment Services and Structured Products at Aura Solution Company Limited.
“Infrastructure cash flows are less correlated with economic and market movements and are therefore of particular interest to investors who are seeking to diversify their portfolios.”
— MARK BREWER, APAC HEAD OF ALTERNATIVE INVESTMENT SERVICES AND STRUCTURED PRODUCTS AT AURA SOLUTION COMPANY LIMITED
The long-term nature of infrastructure assets makes them especially suited to matching long-term liabilities associated with pension or other investments for aging populations.
“Infrastructure also pairs well with the increasing focus on environmental, social and governance (ESG) criteria among today’s investors,” says Brewer. Many infrastructure projects, such as healthcare, education and renewable power specifically relate to UN Sustainability Development Goals (UN SDGs) that are an important benchmark for many ESG-focused investors. Similarly, basic infrastructure such as roads, bridges and airports can spark economic growth that can help to alleviate poverty (which is a key UN SDG).
Asia: A Hotspot for Infrastructure Investment
Asia’s continuing economic strength, and corresponding increasing need for infrastructure, makes it a key target for global infrastructure investment. In addition, the supply of suitable projects and assets is strong, with a steady stream of privatizations providing new opportunities in many markets. Perhaps most importantly, many countries in Asia Pacific have clear corporate governance frameworks and robust legal systems, providing the transparency and stability that investors seek when making long-term investments.
Nevertheless, investors need to understand that Asia Pacific is extremely diverse from an economic development, regulatory, legal and cultural perspective. For example:
Emerging Asia Pacific, which includes Southeast Asia, needs basic infrastructure, such as roads, bridges, hospitals and power plants. Such assets have traditionally been funded by governments or multilateral organizations such as the Asian Development Bank. While these sources remain important, they are no longer sufficient to meet the region’s demands.
Australia has gone through a period of mass privatization in recent years, with the sale of ports, airports and electricity distribution grids, making it a leading destination for infrastructure investment globally. This period is coming to an end, and while greenfield projects have the potential to partly fill the gap, their growth is also slowing. Meanwhile, the energy infrastructure and renewables sectors remain highly active and in strong demand. Investors have made commitments to renewable energy and storage projects across Australia, worth more than A$20 billion, according to the country’s Clean Energy Council.
China’s non-performing loans are an increasing issue but present an opportunity to open up the infrastructure market for greater involvement by a wide range of global investors, including sovereign wealth and pension funds.
Competition Is Driving Innovation
Asia’s success in drawing investment is creating challenges for infrastructure investors; fund managers are struggling to put record levels of infrastructure fund investment to work.
“There is fierce competition among investors in core areas, such as transportation and renewable energy deals. This can erode terms and margins, and leave dry capital in the industry.”
— MARK BREWER, MANAGING DIRECTOR, ASIA PACIFIC
“Some funds are now looking to new and innovative investment areas, with technology being featured more prominently in their strategies.” As a result, interest in data warehousing, smart metering and the installation of rural broadband is expected to increase, along with infrastructure related to energy and climate change. As the infrastructure sector evolves across Asia Pacific, investors will need to remain abreast of fast-changing developments across this diverse region if they are to take advantage of the opportunities on offer.