This year’s event on 22 – 24 June was virtual and global. Andrew moderated the third of three sessions on Asia, focused on Asia as a strategy for portfolio diversification. He was joined by GIC’s Nicole Goh, Pantheon Ventures’ Jie Gong and OMERS’ Prateek Maheshwari.
An oft-quoted estimate from the ADB two years ago is that developing Asia needs an annual $1.7 trillion to be spent on infrastructure out to 2030. At the same time, one recent estimate has $70 trillion earmarked by the private sector for infrastructure globally. Even discounting hugely to move from potential to actual numbers, there is increasing deal flow in the region. How should GPs and LPs invest in this deal flow so as to diversify into Asia whilst not diversifying away from reasonable, long term, hopefully inflation – linked returns?
Immediately, Asia offers its own diversification in terms not just of size and stage of development (developed / developing / frontier markets?) but also in terms of appetite for FDI, influence of local players, robustness of legal systems, levels of corruption, culture, even religion. Then within countries, industry sectors differ markedly.
Future risk profiles – not all bankable yet – extend current appetites:
- Renewables in rich north – east Asia: new sub-categories such as floating solar (Indonesia), pumped storage in mines (Australia) and battery storage (everywhere).
- Response to Covid: healthcare and fresh / waste water (which have struggled in the past so need to be relaunched with more government support).
- New tech: cell phone towers and data centres (already being financed in several countries in Africa, for example).
Key issues in Asia in particular:
- Political risk: license regimes often need to be more robust; the credit worthiness of sub – sovereigns as offtakers needs to be enhanced; ineffective / unwilling decision making needs strengthening via capacity building / training (as elsewhere).
- Investors and lenders need to manage that political risk with boots on the ground and by JVing with local players, often family – owned oligopolists.
- ESG matters: not just identifying and acquiring land but also clearing it of legal and casual occupiers can be more challenging in Asia. Cement is a key input to all infrastructure yet its manufacture accounts for fully 8% of global CO2 emissions: is this getting the attention that it deserves? Then transporting the cement gives rise to further emissions (and carries its own costs. For example, a sack in Papua can cost ten times what it does in Java). And more.
- We didn’t even get onto coal, still the dominant fuel for electricity in India and China.
In conclusion, there is enormous potential for investing in infrastructure in Asia which can be used to grow / diversify investment portfolios. Converting potential to actual opportunities, though, takes careful structuring by host governments and sponsors so as to allocate risks to those parties willing or best able to manage or absorb those risks and thus deliver investment profiles acceptable to GPs and LPs. Advice is needed!
