Investors see Asia as the new frontier

The infrastructure asset class in the Asia-Pacific region excluding Australia is attracting growing interest from institutional investors as a less crowded market offering yields superior to core brownfield developed-country assets they've focused on in recent decades.

As a function of Asia's less mature infrastructure market, "we're seeing less direct competition for assets in this part of the world," said Neil Johnson, Hong Kong-based managing director and head of China for Macquarie Asset Management's infrastructure arm, Macquarie Infrastructure and Real Assets Inc.

"We're able to achieve slightly better pricing power as a result," he said.

MIRA managed roughly A$178 billion ($123 billion) in infrastructure assets in public and private funds, co-investments, partnerships and separately managed accounts as of Sept. 30.

"Valuations across the globe are high but we are finding … a little bit more opportunity in Asia in the beta space than we are in the U.S.," agreed Kevin Bong, deputy director, economics and investment strategy, with Singapore sovereign wealth fund GIC Pte. Ltd., in a panel discussion May 6 at the Investment Management Association of Singapore's annual conference.

GIC, which admits to assets of more than $100 billion, roughly a quarter of analysts' estimates, invests in infrastructure both directly and through funds.

Even as Macquarie has had to move beyond certain traditional infrastructure segments to maintain returns on assets in developed markets, "we're still able to generate the target level of returns we require in a number of the more traditional sectors in Asia," said Mr. Johnson.

Recent examples include the 31.7% stake a MIRA-led consortium acquired in Philippine geothermal power producer Energy Development Corp. for about $1.3 billion in October 2017 and its $1.5 billion purchase of nine toll road projects from the National Highways Authority of India in March 2018.

"This is an exciting time to be in the Asia-Pacific region," due in part to the diversification benefits to be gained here for Caisse de Depot et Placement du Quebec's global infrastructure portfolio, said Cyril Cabanes, Singapore-based managing director and head of infrastructure investments, Asia-Pacific, for the C$309.5 billion ($230.2 billion) Montreal-based manager of Quebec pension and other public assets.

There are currently 18 infrastructure funds focused on Asia, targeting $11.4 billion total in capital, according to Preqin.

The big theme in Asia-Pacific, likely to accelerate in coming years, is capital recycling. It's being led by Australia, where states like New South Wales have heavily reinvested the proceeds from privatizing state-owned infrastructure assets in new projects, noted Mr. Cabanes. Signs that big infrastructure-hungry markets in the region such as Indonesia and India could be moving in the same direction are another reason — above and beyond the region's globe-beating economic growth — to expect opportunities in this part of the world to increase, he said.

CDPQ, which opened an office in Singapore in 2014, reported a C$23 billion portfolio of infrastructure assets as of Dec. 31, up from C$16 billion the year before — entirely in direct investments made in conjunction with local partner platforms. The fund has plans to expand its infrastructure holdings to C$50 billion in four years' time.

The Asia-Pacific market is "maturing quite quickly but it remains a very diverse region, so you can't apply a one-size-fits-all approach," said Mr. Cabanes. "Investing in Korea is vastly different from India or Indonesia. The markets are at completely different stages of maturity — it's very important to have a granular, market-by-market approach, but as a totality it's an extremely attractive region," he said.

The past few years have seen big state-owned ports and electricity grids privatized in Australia, the most active Asia-Pacific infrastructure market, with toll roads, renewable wind and solar projects and digital technology among the new opportunities attracting investors throughout the region now.

The region's "incredible complexity" should ensure that experienced fund managers such as MIRA will continue to be tasked with managing the majority of capital flows to Asian infrastructure, said Mr. Johnson.

Still, "it's likely that we're going to see more direct activity" in Asia by big European and North American pension funds and sovereign wealth funds over the coming five to 10 years, he said.

Ontario Municipal Employees' Retirement System, the C$97 billion Toronto-based pension fund, is doing its part in that regard. OMERS opened a Singapore office in 2018 and appointed Bruce Crane as managing director for OMERS Infrastructure to look for opportunities to complement the C$20.8 billion of global infrastructure assets with more Asian assets.

"We made our first investment in Asia on the infrastructure side three months ago" — a C$170 million investment in an Indian toll road — but "clearly we're not going to stop there," said Mr. Crane. "My task over the next two to five years is coming up with what is the right allocation for Asia," he said, adding that OMERS is playing "the long game."

If offshore investors are moving to allocate money to Asian infrastructure, a growing number of Asia-based investors are likewise thinking globally about the asset class.

"We're definitely not seeing any slowdown of interest in the sector," said Isabelle Demir, head of real assets and private equity with Melbourne-based investment consulting heavyweight Frontier Advisors Pty. Ltd.

"There's huge interest from Japanese and Korean investors this year," looking to get exposure to the sector, said Ms. Demir.

Most have only dipped a toe in the water, if that, but are talking about moving toward the 5% to 10% allocations held now by many institutional investors in Australia, Scandinavia and Europe, she said.

Meanwhile some of the biggest asset owners in Asia over the past year or so have begun making allocations to infrastructure both at home and abroad.

Japan's ¥150.7 trillion ($1.38 trillion) Government Pension Investment Fund, Tokyo, over the first four months of 2018 hired StepStone Group LP and Pantheon Ventures LLP to run core global infrastructure fund-of-funds portfolios, and DBJ Asset Management Co. Ltd. to oversee a core domestic infrastructure fund-of-funds strategy.

And in early May, GPIF Chief Investment Officer Hiromichi Mizuno, speaking on a panel at a Milken Institute Global Conference, said his team is considering infrastructure investment in developing countries as well.

In late March, Japan's ¥21.8 trillion ($201.5 billion) Pension Fund Association for Local Government Officials, known locally as Chikyoren, hired UBS Asset Management to run an overseas infrastructure mandate, adding to mandates awarded over the past three years to J.P. Morgan Asset Management and Mitsubishi UFJ Trust and Banking Corp. for global infrastructure and Mitsubishi Corporation Asset Management Ltd. for domestic infrastructure.