“More transparent, easy to understand, and consistent regulatory policies from governments will improve the overall investment climate.”
The infrastructure sector of Southeast Asia is increasingly being viewed as an attractive option for private equity (PE) investments. As governments of Southeast Asian countries increase their emphasis on upgrading the region’s infrastructure, ever more new investment opportunities for PE players will be generated. The heterogeneity of the countries in the region will entice PE firms with varying levels of risk appetite. Economic and regulatory challenges further make investments in the region difficult. Vijay Pattabhiraman, Chief Investment Officer, Global Real Assets – Asian Infrastructure, J.P. Morgan Asset Management, offers his views on the overall investment scenario in Southeast Asia, the role of PE, issues and challenges being faced, and measures to improve the overall business climate in the region…
What is your perspective on the current investment and business climate for infrastructure projects in Southeast Asia?
Major Southeast Asian markets, such as Indonesia and Malaysia, are relatively still promising, although the recent oil price decline has the potential of adding an additional level of risk to their macro investment environment. Additionally, in Indonesia, the ability of the new government to push through much-needed reforms remains to be seen, given what seems to be the lack of broader political support in Parliament for the new president.
What role has PE played in financing infrastructure in the region? Which sectors are more attractive in terms of PE investment?
Given the key issues with respect to regulatory risks and land acquisition, most large-scale infrastructure projects have largely been developed by government/ quasi-government entities historically. That being said, we see utilities, water, and waste management as areas that could garner interest from private capital. Core resources, such as thermal coal or palm oil, could also come into play at some stage next year. We have worked on and evaluated a number of transactions over the years in Southeast Asia and hope to gain greater comfort with respect to the risk elements in the various infrastructure/infrastructure-related industries within the region.
From an investor’s perspective, how do you view the creditworthiness of infrastructure projects in Southeast Asia currently?
We generally invest in companies with strong management teams that are already in business and provide them with growth capital to help expand their business. We tend to avoid pure single-asset greenfield risk. Given the unclear regulatory environment and potential for significant delays in land acquisitions, we believe investing in greenfield projects involves significant risks that we, as a team, are not willing to take at this time. It is a common misconception that PE-like returns in infrastructure assets can only be achieved by entering a project early in the development life cycle. However, our experience indicates that through heavy implementation of operational improvements in existing assets/businesses, while expanding the scope of their operations through roll-up and/or development, can be an alternative approach.
What are the trends you expect for PE investments in the infrastructure sector in the coming years?
It will be difficult to channel large investments into independent power producers or toll roads in Southeast Asia. The governments have to offer a lot more support, regulatory and economic, if they are committed to attracting private investors into such large and critical projects. Private companies in growth mode and operating niche businesses will continue to attract interest from private investors. There are definitely interesting opportunities unfolding in this segment.
What have been your recent exits in the region? What rates of returns do you expect from the infrastructure sector in the region?
We generally expect PE-like returns consistent with investments in these sectors in the region with an average exit horizon of four to six years.
What are your views on the economic outlook for Southeast Asia over the next two to three years?
Market expectations are for continued growth at a relatively faster pace compared to most emerging economies. Macroeconomic and fiscal challenges remain and they are unlikely to be solved in a short time frame. The key focus area will be to effectively navigate these markets, in spite of these challenges.
Which are the infrastructure sectors you are bullish on? Going forward, what will be your strategy in the region?
Currently, utilities and resources are of interest. As for strategy, generally, the intention is to capitalise on the expansive need for infrastructure currently seen across the region, primarily seeking capital appreciation-driven returns by investing in acquiring and/or developing a range of PE-style investments with a focus on infrastructure and related resources opportunities. Our definition of infrastructure in the Asian context also includes those related industries (including construction and building materials) involved in the entire value chain of delivering infrastructure. We prefer to invest primarily in growth opportunities, providing expansion capital with a focus on sustainable (economical, social, operational, and environmental) investments through privately negotiated transactions with experienced local partners.
The figure is an illustrative example of the expansion/growth-phase segment that we are referring to, which we view as most appropriate in the Asian context.
What are the key issues and challenges being faced by PE investors in the region?
Primarily, high multiples in traded exchanges tend to inflate sellers’ expectations along with the fact that there is ample liquidity with local banks, which tends to delay raising equity.
What should be done to improve the investment scenario and investor sentiment in Southeast Asia?
More transparent, easy to understand, and consistent regulatory policies from governments will improve the overall investment climate. Land acquisitions have to be actively assisted. The track record of some successful exits in recent years will also help in generating a positive momentum.
