The current market environment is characterized by low yields, intense competition for assets and increased regulatory volatility in many countries previously considered to be stable. This poses a significant challenge for capital deployment in general and investments in infrastructure in particular, according to a report.
“We believe that an allocation to emerging markets private infrastructure is an accretive addition to a private markets investment portfolio, especially based on three megatrends: (i) the need for energy, (ii) the “production – consumption disconnect” (a persistent and growing distance between centers of consumption of natural resources and mining areas) and (iii) increasing urbanization and mobility. These trends offer attractive infrastructure opportunities in energy, commodity and urban infrastructure. While these segments show differing characteristics in terms of size and level of regulation, in our view, the end user’s willingness to pay for an infrastructure-related service represents a key criterion for sectorial and regional assessment,” Partners Group Research in its Flash October 2013, revealed.
“The potential tangible improvements to a country’s economic efficiency through infrastructure reward investors in emerging markets accordingly and offer a compelling proposition with long-term outperformance potential. Such investments – particularly those in countries demonstrating solid economic fundamentals which offer country premiums which more than compensate for the increased risk – can generate highly attractive returns for investors, as outlined in the chart below. Furthermore, renewable energy investments in particular constitute an interesting relative value play,” the report said.
“We believe that a global emerging markets approach based on the flexible use of different investment instruments, such as equity, preferred equity and mezzanine, can be an effective way of accessing the emerging markets infrastructure opportunity. The implementation of this approach is more complex than executing on “plain-vanilla” bond-like infrastructure investments in mature markets. A global network, advanced skillset and well-resourced platform are important prerequisites to deliver on the strategy, combining the best of both worlds – solid returns for the investors with tangible economic and social impact.”