Investor sentiment towards private equity infrastructure assets is approaching record levels. This has left Asian investors asking whether they should continue their search for infrastructure or look at other asset classes.
The sentiment is backed by data on private infrastructure equity fundraising volumes, which this year are on track to reach their second largest total in the last seven years. Our sister publication Infrastructure Investor has produced data which suggest that fundraising in Q1 2019 showed a continuation of the momentum seen last year, with $19.96 billion raised across six funds.
At this month’s Investor Summit in Seoul and Tokyo, investment professionals from six institutions shared their current risk appetites and preferences in private infrastructure debt markets.
South Korean investors are adding to their mezzanine allocations. These investors are showing a willingness to move further towards junior structures and away from senior debt. Some are even prepared to take the equity portion of an investment target.
Their Japanese peers are limiting their exposure to specific risks, including country risk and operational risk. Many are worried about staying invested in certain countries where they regard the payment risk as too high.
Mezzanine debt is preferred over senior debt, according to Jiroo Eoh, head of the infrastructure and real assets investment team at ABL Life Insurance. He added that this was because the firm, part of China’s Anbang Insurance Group, aims to obtain additional yields from offshore investments.
Those with higher funding costs are also willing to look at asset-backed securities with underlying infrastructure projects. Hyungon Kim, senior manager at Korea Teachers’ Credit Union, told PDI his team was willing to consider collateralised loan obligations and commercial mortgage-backed securities linked to infrastructure projects. It is understood that KTCU’s cost of funding is as much as 4.5 percent for 2019, up from 4 percent during 2018.
Others are considering emerging markets to source higher-yielding deals. One such investor is Samsung Life Insurance, whose head of project finance, Si Wan Lee, said that securing internal investment committee and risk assessment approvals for such deals would still be challenging.
Plenty of Japanese investors appeared to shun the country risks associated with certain infrastructure projects.
Shigefumi Kuroki, a Tokyo-based general manager and head of global infrastructure investments in the structured finance department at the Development Bank of Japan, believes the US’s sophisticated capital markets can offer him various financial products linked to infrastructure projects and assets.
He noted that as yields from domestic project financing deals had flattened, Japanese investors had gone offshore in search of increased spreads. He added that assets in the UK were not desirable now because political risks are rising and there is uncertainty around Brexit.
As PDI reported in 2018, it was clear that Japanese investors liked the asset class and were looking for cash yields from the debt strategy. Among the topics discussed by investors at last year’s summit were how to select the best manager and how best to amass an infrastructure debt portfolio.
This year’s main topic appeared to confirm the changing nature of Japan’s institutional market.
Tadasu Matsuo, head of alternative investment at Japan Post Insurance, last year focused on assessing infrastructure managers’ relative strengths by examining the structures of their underlying assets and looking at their funds’ deal pipelines.
This year, he was discussing how to secure accurate and up-to-date information on the assets contained in offshore infrastructure debt funds. “But even in case of the onsite visits for infrastructure assets, the information that we can get is very limited,” he noted. “It is disseminated widely.”
Masashi Kataoka, a general manager in the alternative investment department at Dai-ichi Life Insurance Company, added,“Infrastructure debt or project finance, they are a basis of banks. But because of the [banking] regulations, [private] funds are now getting into this space. So, there is room for further growth in infrastructure debt.”
To be continued
Amid the prevailing low-to-negative yields for traditional fixed-income assets, Asian investors are increasingly pursuing private infrastructure debt strategies.
Many Asian investors also expect such investments to provide them with the benefits of portfolio diversification. According to research published by Schroders Investment Management private infrastructure covers a range of maturities (from five to 30 years), payment terms (fixed or floating rates), credit risks (investment grade or high yield), regions and sectors.
Recent PDI infrastructure debt fundraising data support that view. Some of the year’s big fundraisers over the past 12 months are Global Infrastructure Partners, Edmond de Rothschild Asset Management, and Schroders Investment Management, whose fundraising target totalled more than $3.5 billion as of 9 May.
Both Korean and Japanese institutions have become active players in global infrastructure debt markets. The six limited partners mentioned above – ABL Life Insurance, Korea Teachers’ Credit Union, Samsung Life Insurance, Development Bank of Japan, Japan Post Insurance, and Dai-ichi Life Insurance Company – collectively represented around $1.5 trillion of assets under management as of the end of Q1 2019.
Others, however, think that the concept of private infrastructure debt fund investment is unique and special, Masashi Kataoka at Dai-ichi Life Insurance Company added.