HONG KONG (Dow Jones Investment Banker) – It only stands to reason. Asia’s insatiable appetite for investments in transportation, utilities, communication and social infrastructure assets should have created a wealth of opportunities for dedicated, listed funds. Few, however, have tried to tap this burgeoning market, and those that have taken the risk have shown poor returns.
Multiple factors, including a lack of asset focus, difficulty in investing in local infrastructure, the crunch in the credit market and a narrow research analyst following have stymied the growth of these funds.
It’s not that Asian investors are unfamiliar with this asset class. Real estate investment trusts (REITs), which are similar to infrastructure funds in that they are yield-focused instruments, are popular with investors in Singapore in particular. There have been experiments with listed infrastructure funds, but typically their performance has been disappointing, with significant gaps between quoted security prices and underlying valuations.
These missteps will lead market participants to continue to seek the more agile unlisted vehicles to invest in infrastructure assets at the expense of listed funds.
Such a dire expectation may have led Hyflux Water Trust, which listed in late 2007 in Singapore to invest in water-related assets across emerging markets, to take the unusual step of calling it a day last November, conducting a rather rare voluntary delisting and seeking its fortunes as a private venture with Mitsui.
The reality is that Asia’s massive needs to finance infrastructure assets are estimated to hit $750 billion every year until 2020, according to the Asian Development Bank. Big dedicated funds must be allowed to flourish in order to efficiently allocate capital toward key projects.
But listed infrastructure funds had a poor start.
Some of the trouble arose because not all the funds offered a long-term focus on Asia. The Macquarie International Infrastructure Fund (MIIF), for instance, listed in Singapore with a $480 million IPO in May 2005 and followed up with a $255 million equity offering in November that year. In the ensuing years, its share price has plummeted by almost 45%.
One of the main reasons, some investors say, is that the fund initially focused on OECD countries’ assets. Only later did it rebalance its portfolio to target Asia, and, even then, MIIF has struggled to expand and add regional investments.
Macquarie’s troubles are not unique. Global Investments Limited, which was listed by Babcock & Brown in a $290 million IPO in 2006, also in Singapore, has not only suffered from its sponsor’s collapse but also failed (despite a change of name) to convince investors of the merits of its largely Western assortment of aircraft leases, loans and securitization assets.
Restrictions on ownership and limitations on foreign direct investment also have curbed listed infrastructure funds in Asia, as indeed many private equity firms operating in the region.
The traditional buyout model makes it difficult for these funds to invest in local assets over which they can have operational control – or even, in some cases, a good level of negative control. Despite some recent improvements (Taiwan eased all limits on foreign direct investments in October 2008), some countries still have FDI restrictions, most particularly in the telecommunications sector, where China and Thailand both impose a 49% cap. Indonesia is even more restrictive with a 35% limit. Thailand also limits investments by foreign investors in its electricity sector to 49%, while a 40% cap on foreign equity ownership continues to apply across much of the Philippine economy.
Moreover, infrastructure funds have also been impacted by the credit crunch. First Ship Lease Trust of Singapore had to pull a proposed issue of up to $200 million of seven-year senior notes in December 2009 as the Dubai World financing debacle surfaced.
Further, as stock prices have collapsed (and yields, which move conversely to prices, have risen – in some cases to high, double-digit figures), it has become more difficult for these funds to make accretive acquisitions. In Singapore, Temasek-sponsored CitySpring Infrastructure Trust noted in an investor address in late 2009 that “though there are many potential opportunities in the present environment, the valuations are however yet to be attractive.” The trust’s last big buy was the January 2008 purchase of Basslink, an electricity interconnector in Australia whose bonds have just seen their rating placed on negative CreditWatch by Standard & Poor’s, a move that drove CitySpring’s unit price sharply lower.
Given these troubles, it’s no surprise that stock-exchange trading volumes for these vehicles have remained relatively low, as has the extent of coverage by sell-side research analysts. In turn, this has curbed investor interest and limited their ability to raise further equity through secondary equity placements. For instance, the average three-month daily share turnover for the $1.5 billion Macquarie Korea Infrastructure Fund, as mentioned in a November 2010 general presentation, was only $900,000.
Ultimately, returns have perhaps mainly been driven down by too much money chasing the same projects. At the end of last year, London-based research firm Preqin estimated that 45 infrastructure funds, seeking commitments of over $25 billion, were targeting assets in emerging markets.
The market, in Asia and increasingly globally, is likely to continue to shun the more mature, visible and higher-profile listed funds to invest in infrastructure assets.
More flexible unlisted vehicles, with a longer-term investment horizon, a greater focus on defined assets – and free of the tyranny of dividend yields – will increasingly gain traction.
(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. To comment on this column, please email email@example.com).
[This article was originally published on Dow Jones Investment Banker on 10 December 2010 and is reproduced with permission]
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