A growing number of investment vehicles are attempting to capitalize on the perceived hot opportunity to invest in infrastructure development around the world - especially in developing countries.
Among institutional investors, some sources estimate at least $5 billion has been raised for projects in energy, transportation and telecommunications; sources say several large and medium-size U.S. pension funds are involved, including the $12 billion pension fund of GTE Corp.
Retail investors apparently have flocked to these funds also, as evidenced by the $2.4 billion size of the 30-month-old G.T. Global Telecommunications Fund and the $280 million size of the nearly 1-year-old Montgomery Global Communications Fund.
The number of infrastructure funds has climbed as managers and investors increasingly explore opportunities in emerging economies. As they've done so, investors have discovered an array of shortages in such critical areas as energy capacity, roads and other transportation facilities and telecommunications. Power brownouts, traffic jams, sometimes endless busy signals on telephones and other limitations already have taken an economic toll in some developing countries.
Many experts fear that without improvements to the infrastructure, further economic growth may stall. As one money manager facetiously explained: "You can produce almost anything in Thailand, but you might not be able to get it to a port."
For investors, the problem presents what seems like a golden profit opportunity. Investment vehicles exist in various forms, but usually are equity-linked direct stakes in infrastructure projects and investments in the listed shares of companies - such as those in cement, telecommunications and engineering construction - that service the projects.
In the latter category, the number of infrastructure-related mutual funds has been steadily climbing. Ian Wilson, editor of Micropal Emerging Market Fund Monitor, estimated there are about 12 mutual and institutional funds for infrastructure today compared with one or two funds three years ago.
New or upcoming infrastructure funds include the recently launched, open-end Templeton Global Infrastructure Fund; the open-end G.T. Global Infrastructure Fund, being launched with two other G.T. mutual funds; and the Van Eck Asia Infrastructure Fund, targeting opportunities in Asia, excluding Japan.
Other existing funds for infrastructure include the open-end Gabelli Global Telecommunications fund; the closed-end Emerging Markets Infrastructure Fund and the closed-end Emerging Markets Telecommunications Fund, both managed by Bear, Stearns & Co.; and, reportedly in registration with the Securities and Exchange Commission, is the Jardine Fleming Asia Infrastructure fund.
Quite a few of these have existed for a year or less.
At least some of these mutual funds have performed well - although not in 1994. But over a longer period, Montgomery's global communications fund has gained 25% since its inception almost a year ago; and, between its inception and March 31 of this year, G.T.'s global telecommunications fund posted an annualized 19.5% return.
Some observers consider direct-stake funds for infrastructure to be riskier, given their illiquidity and their focus on sometimes changing or unstable developing countries.
Specific returns in these types of vehicles are "more uncertain" than stock market investments, said Rod Morrison, editor of the publication Project Finance International in London. While investors might hope for, say, a "20% return in Indonesia, it must be difficult to forecast that for five years out," he maintained.
Said Harry Ehrlich, manager of the Templeton Global Infrastructure Fund: "Who can you sell the investment to if you decide that a dam is a bad deal? If I'm dissatisfied with a project, I sell my stock in (say, an involved) engineering construction company and move on. I don't own it for 20 years."
Nonetheless, Mr. Ehrlich welcomes the advent of direct-stake investing in infrastructure. To him, such vehicles provide assets to fund projects that provide business for the companies in which he invests.
Naturally, proponents of infrastructure investing foresee attractive returns. Donald Roth, managing partner of Emerging Markets Corp., Washington, believes infrastructure investments have an edge over other types of direct stakes. That's because many infrastructure projects should result in licensed operations of facilities for things like power and telecommunications in which investors are assured an eventual revenue stream from the project - although earning potential likely would be capped on the upside.
But in Mr. Roth's view, other kinds of direct investments are riskier. As he explained, investors conceivably could lose if they sunk money into, say, a manufacturing plant that ultimately produced goods that didn't sell.
So what kinds of returns should investors expect from direct stakes in infrastructure? John Carroll, president of GTE Investment Management Corp., Stamford, Conn., sees such projects in the China/Southeast Asia region returning 20% to 25% per year. While that may be lower than expected returns from stakes in manufacturing or service businesses in the region, it would still be "very acceptable" compared with returns of leveraged buy-outs in the United States, he said.
GTE is committed to investing an undefined "reasonable amount in China and Southeast Asia" (as direct vs. listed stock investments) through limited partnerships of which infrastructure would be the core component. GTE is now investing in one unidentified partnership for infrastructure projects in China and Southeast Asia and already has committed to partnerships in a smaller way in three other vehicles focused on "general business opportunities," not including infrastructure, in the region. GTE expects to look at several more of the latter in coming months, Mr. Carroll said.
The Emerging Markets Corp., through its Emerging Markets Partnership, is one of three general partners in the AIG Asian Infrastructure Fund that made its debut this past winter. As of its initial closing, the fund had $761.2 million; a second closing May 25 brought it to almost $1.1 billion. Its largest investor, entities of the Singapore government, invested $250 million, while AIG put in $100 million. Emerging Markets Partnership is the principal adviser to the fund.
While Mr. Roth would not name other investors, he said they include several corporations, some pension funds, a number of endowments and some non-U.S. investors. So far, the fund has made one investment - a small stake taken in an unidentified Philippine telephone company. But Mr. Roth expects the 10-year fund will "make investments in 40 to 50 Asian companies."
Besides the AIG fund, other infrastructure direct funds and related vehicles include: the intended $1 billion Asian Infrastructure Fund, a private equity fund not yet closed, sponsored by Peregrine Investments Holdings in Hong Kong; the now $450 million Global Power Investments, a venture among GE Capital Corp., Soros Fund Management and the International Finance Corp.; the $42 million Central Europe Telecom Investments L.P., managed by CETI Managers, a joint venture between Creditanstalt Bankverein of Austria and PanEuropean Financial Services, a central European financial advisory firm; the now $100 million Scudder Latin American Trust for Independent Power fund; and, according to Project Finance International's Rob Morrison, ABB Funding Partners L.P.
The latter, said Mr. Morrison, is a U.S.-based vehicle launched last October by a subsidiary of Asea Brown Boveri Inc. to invest in ABB's infrastructure projects, especially in Canada, Mexico and the United States as well as some non-North American projects. Six outside investors include no pension funds, said Mr. Morrison.
Early this year, U S WEST International, a unit of U S WEST Inc. in Englewood, Colo., announced the formation of the $150 million Russian Telecommunications Development Corp., which would manage and further develop the company's telecommunications projects in Russia.
According to U S WEST, seven outside investors made equity commitments to RTDC totaling $40 million. They were: Baring International Investment, Capital Research International, Emerging Markets Investors Corp., G.T. Capital Management, INVESCO Capital Management, Montgomery Asset Management and Morgan Stanley Asset Management. In addition, the Overseas Private Investment Corp., a U.S. government agency, offered $75 million in debt and $10 million in quasi-equity financing.
A U S WEST spokesman said the company's pension fund is not an investor in RTDC.