Infrastructure Investor’s Japan Korea Week wrapped up last Friday, with more than 500 delegates – including around 250 LPs from the region – attending our back-to-back summits in Seoul and Tokyo.
The events provided plenty of insights on Asian LPs’ evolving views of the asset class. Here are four key takeaways.
Tough times for debt investors
Infrastructure debt is worrying Korean LPs, as returns have compressed across the asset class.
“PPP-type projects are preferred [among Korean investors]. But senior loans from these are only yielding 2 percent in Europe. That is not enough [for us] to go into that market,” Jason Hyunjae Kim, head of the infrastructure team at Samsung Fire & Marine Insurance, told sister publication Private Debt Investor.
And as fund managers move towards lesser-known geographies in search of higher returns, Korean LPs are having a hard time following them. Si Wan Lee, head of project finance at Samsung Life Insurance, admitted that his firm is having issues committing capital to more “exotic countries” due to its “strong” investment guidelines.
“We can venture into Latin America, [countries] like Mexico, Peru, or Chile. [But] it is tough due to our internal credit team’s concerns [on investing in these countries],” he said.
Co-investment is key
Korean players are used to investing directly in their domestic infrastructure market and are looking for similar opportunities abroad. Therefore, when it comes to choosing global fund managers, potential co-investment opportunities play an important role.
“What is important for us is to have more opportunities for co-investment, and more information [about deals coming to the market],” explained Samsung Fire & Marine Insurance’s Kim, during one of the panels in Seoul.
Hyungon Kim, senior manager at the Korean Teachers’ Credit Union, sent a clear message to the GPs in the room, explaining that his institution is looking for mid-sized funds that also provide co-investment opportunities.
“Our investment ticket stands at between $50 million and $100 million,” he said. “But we can have a higher ticket under exceptional circumstances, when we are building a special relationship with a GP.”
Get used to lower returns…
To date, Japanese investors have focused most of their energy on core infrastructure. But as Philippe Busslinger, senior managing director for Europe at Canadian pension Ontario Municipal Employees Retirement System, pointed out, “it’s getting harder and harder to generate excess returns” from core infrastructure. Harder, but not impossible. Despite the “healthy competition”, Busslinger argued opportunities still exist to make “a very good [risk-adjusted] return”.
Also, as QIC global head of infrastructure Ross Israel said, the definition of core is not static. “Core assets in the next 10 years will be different to those in the last 10 years,” he said, highlighting how assets in the electricity sector have been evolving.
Savvy investors looking for outsized returns from traditional infrastructure would do well to spot this new generation of core as early in the cycle as possible.
…or get ready to go beyond core
Perhaps because of the squeeze on core returns, though, Japanese institutional investors are gearing up to diversify their exposure to the asset class – in terms of strategies, geographies and fund managers.
Yasuhiro Ono, director of private equity and infrastructure at Japan Post Bank, said that his firm is looking to diversify their regional, vintage and sector exposure. “We also believe that we should diversify our approach to investment, and we are making efforts to participate in co-investment opportunities,” Ono added.
Still, Japanese LPs made clear that, between shifting asset class definitions and new infrastructure-like products entering the market, they are more eager than ever to understand the assets being acquired by managers.
“It’s important for us to visit the assets and understand the risks associated [with them], and that the risk level is not too high,” Hisamitsu Iida, private assets portfolio manager at Sompo Japan Nipponkoa Insurance, said.
The watchword to remember? Transparency.