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Funds chase profit in booming Asian infrastructure

The prospect of double-digit returns has attracted a wave of new funds and players.

india Updated: Mar 13, 2006 12:28 IST

Global money managers are stepping up efforts to profit from Asia's infrastructure boom, lured by the prospect of billions in spending on everything from new roads and ports to railways and power grids.

From mutual funds aimed at average investors to private equity vehicles powered by pension fund cash, the industry is fighting to capitalise on a trend it sees lasting years.

Regional heavyweights China and India are top targets for such investment as economic growth of nearly 10 per cent a year trumps concerns about the risks involved.

"When you look at the state of Indian infrastructure, it requires significant improvement, whether it is the airports, or the ports, or the roads, or the electricity supply," said Krishan Sehgal, head of Asian infrastructure investment for AMP Capital Investors.

"The infrastructure related industries and businesses are growing even faster than the GDP growth, so for an investor India is an attractive opportunity."

The firm, a unit of Australia's AMP Ltd, announced the closing in January of its $102 million Infrastructure Fund of India, a private equity vehicle backed by Australian and Asian institutional investors. It was AMP's second such fund in a decade.

A 2005 study co-sponsored by the World Bank estimated that East Asia needs to spend $1 trillion on infrastructure over five years to meet the needs of rapidly expanding cities, rising populations and robust demand from growing businesses.

Investment by fund managers to date has played a minor role compared with bank financing, said John Bailey, managing director of Asian corporate and infrastructure ratings for Standard & Poor's.

But with hedge funds and private equity houses on the hunt for higher yields than they can get in the mature markets of North America and Europe, Bailey said greater involvement makes sense.

"The local governments do need outside funding. In China in particular, if you look at the funding requirements that are needed for ports to railways to roads and so forth, they're not going to be able to do it themselves," he said.

"One side needs capital, and the other side needs investments ... having said that, these types of projects can be a bit more problematic."

Bumps on the road

AMP's Sehgal said the challenges of such investments include regulatory risk, the slowdowns and stoppages that can hit large construction projects, and the ability to exit closely held investments through initial public offerings.

But the rewards can be rich. He said some of AMP's Indian investments jumped 8 to 13 times in value, while the fund targets an internal rate of return of more than 20 per cent.

The prospect of such double-digit returns has attracted a wave of new funds and players.

Australia's closely held Allco Finance Group Ltd recently launched a $200 million structured finance fund which expects to invest in Chinese power stations, pipelines, railways and other infrastructure. Backers include Dutch bank ABN AMRO.

A South Korean infrastructure fund partly owned by Australia's Macquarie Bank Ltd raised $964 million in an IPO on March 7 to invest in toll roads and other infrastructure.

The fund was priced at the lower end of expectations, raising speculation of buying fatigue at the institutions which have backed such deals.

Yet just days later, Macquarie announced the launch of a $350 million South Korean private equity fund targeting gas, power, water, media, telecommunications and other infrastructure plays.

Invesco Hong Kong, a unit of Anglo-US fund manager Amvescap Plc, is targeting retail investors with a fund launched this month that will buy shares of non-Japan Australian and Asian firms which benefit from infrastructure spending.

"This is a longer-term, sustainable product because infrastructure is a multi-year trend," said Mabel Chan, head of retail sales at Invesco Hong Kong.

AMP's Sehgal said while there might be "bumps on the road", he thought the major emerging Asian nations would have to keep building to ensure poor infrastructure didn't drag on growth, with ports being one example.

AMP's fund has invested in Gujarat Pipavav Port in western India, which is upgrading to handle a projected surge in container shipping. Without such investments, foreign trade could face bottlenecks that affect the entire economy.

"Looking forward, I think the growth story in Asia will continue to have legs," he said.

First Published: Mar 13, 2006 12:28 IST