Hong Kong: With trillions of dollars to be spent on infrastructure in China, India and other emerging markets in coming years, private funds are pouring into a sector with clear opportunities—and plenty of risk.
Investors are flocking to the sector as Asia and other emerging markets rapidly urbanize, attracted by potentially steady long-term returns in real assets as a hedge against volatile financial markets.
The case for infrastructure spending is obvious: In India roads, power supply and airports are notoriously inadequate after decades of under-investment. In Beijing, every day brings 1,200 new cars to the Chinese capital’s gridlocked streets.
“For a fridge, you need reliable electricity generation. For cars you need roads,” said Macquarie strategist Stewart Ferns. “Infrastructure investing is the best way to play the emerging markets scene at the moment in terms of growth.”
Last month, Morgan Stanley and a fund set up by General Electric and Credit Suisse said they had raised nearly $10 billion (Rs42,900 crore) collectively to invest in infrastructure projects around the world.
In Asia, private equity firms have raised $1.45 billion this year for dedicated regional infrastructure funds, according to the Asian Venture Capital Journal, approaching the $1.84 billion raised for all of 2007.
Societe Generale’s Lyxor Asset Management and Macquarie both launched infrastructure funds this year that are open to retail investors, while the fund arm of UBS said infrastructure funds are a top priority in Asia.
“Governments are facing increasing budgetary constraints and many recognize that the private sector has a crucial role to play in the ownership and operations of infrastructure assets. The long-term opportunity is therefore enormous,” said Christof Kutscher, head of Asia-Pacific at UBS Global Asset Management.
This month, Merrill Lynch lifted its forecast for emerging markets infrastructure investment to $2.25 trillion a year— or 5% of gross domestic product—over the next three years from $1.25 trillion.
Questions over land title, contract terms, and control can plague infrastructure projects, especially in emerging markets. “A less opaque regulatory environment would certainly help bring more investment,” said Markus Rosgen, head of Asia-Pacific equity strategy at Citigroup.
Infrastructure projects tend to be capital-intensive, long in duration and thus potentially exposed to economic cycles.
“The biggest downside risk would have to be a macro kind of shock,” said Rajiv Lall, chief executive of Infrastructure Development Finance Co., which last year unveiled a $5 billion Indian infrastructure fund with partners including Citigroup Inc. and Blackstone Group. Too much money aimed at similar projects can raise prices and drive down returns, as has been seen in once-hot pockets of the property sector in China and India.
“Relative to building the 10th new retail mall in a suburb of Mumbai... I’d much rather build the first distribution park in the steel industry of Orissa, where you’ve got great demand,” said Alastair King, CEO of UK-based India investor Eredene Capita.
India says it needs $500 billion in infrastructure investment in the five years through 2012, with 30% of that expected from private sources, and is the target of numerous funds: Babcock and Brown, the UK’s 3i, and a joint effort between the State Bank of India and Macquarie are among those raising or to have recently completed India funds. REUTERS
Jeffrey Hodgson contributed to this story.