Tiger stalking the dragon
While China took an early lead in infrastructure development by investing heavily
in the 1990s, India is quickly catching up. China’s growth has been driven by the
use of a closed, self-sufficient model that excluded many private investors from
projects. By contrast, India pursued a more open model, is actively encouraging
foreign investment and is beginning to see a huge amount of private fund inflow
as a result. Consequently, while there is nominally more money going into the
infrastructure sector in China, the opportunities for foreign investors going
forward are heavily weighted to India.
Booming global demand
Demand for infrastructure assets is at an all-time high. There is circa US$90bn of
new money in private funds looking to be invested, as well as the potential for
direct investment from pension funds and additional investment from listed
companies with a total market capitalisation of US$1,767bn. Tellingly, more than
US$16bn of Indian infrastructure-specific fund raisings were announced in the
first four months of 2008 and changes to the Chinese insurance laws in 2006
have freed up ~US$16bn of equity funding for infrastructure asset investments.
The challenge for the sector is the supply of quality assets. Thus far, the number
of new deals coming to market has not kept up with the growth in demand –
particularly in developed markets. This has resulted in a re-rating of
infrastructure assets, which has increased prices. As good value projects
become more scarce in the developed world investors are increasingly looking
abroad to developing countries such as China and India, which have set
themselves ambitious investment targets – China earmarking well in excess of
US$543bn for infrastructure expenditure in 2006–10, and the Indian government
hoping to commit US$594bn of public and private money to infrastructure over
the next 4–6 years.
Infrastructure outperformance
The Macquarie Global Infrastructure Index (MGII), which serves as a proxy for
globally listed infrastructure companies, achieved a CAGR of 25.7% (USD TR
Index) between March 2003 and March 2008, well ahead of global indices. The
MGII 100, which represented 84% of the total index at 31 March 2008, returned
25.2% over the same period. That means that the remaining 16% of the index,
which includes the stocks in emerging markets, contributed 50bp to the
performance of the index over the period.
Faced with declining risk-adjusted returns from traditional investment channels,
investors are increasingly going down non-traditional routes in search of better
investment options. For instance, in mature markets like Australia, pension funds
have increased their investments in infrastructure to around 5%. The key
characteristics of infrastructure – high entry barriers, inelastic demand, stable
cashflow and long duration – are a good match for the requirements and longdated
liabilities of pension and infrastructure funds. Infrastructure also exhibits a
hybrid nature of both fixed income and capital gains and offers a variety of risk
and return profiles.