Sovereign wealth funds have slowed down their investment in infrastructure, according to research from the International Forum of Sovereign Wealth Funds (IFSWF).
The number of infrastructure investments made by sovereign wealth funds dropped by 15 percent year-on-year, from 33 deals in 2016 to 28 transactions in 2017.
There are two factors driving this trend. First, some SWFs are encountering greater resistance from regulators, preventing them from investing in major infrastructure assets. Regulatory regimes in the United States and Europe are installing more stringent screening processes for foreign direct investments in strategic infrastructure assets.
Second, government-owned funds are facing increased competition and higher valuations for mature assets in developed markets, as more investors seek bond-replacement exposure to infrastructure assets’ steady cash flows. Australia has been a case in point where major privatization programs have been hard fought. For example, in May 2017, the Qatar Investment Authority was part of a Macquarie-led consortium that purchased a 50.4 percent stake in the 99-year lease in one of Australia’s largest electricity companies, Endeavour Energy. The consortium won the hotly contested asset — auctioned by the government of New South Wales — which fetched a final valuation of approximately A$15.1 billion ($12.1 billion) a multiple of 1.6 times the grid regulated asset base (RAB). The valuation was in line with two other Australian assets auctioned off by the government in 2015–2016: Transgrid, which sold for A$10.3 billion to a consortium that included several government investors, and Ausgrid, which sold for 1.4 times RAB.
Consequently, SWFs are turning to Asia and Latin America to find established infrastructure companies with predictable cash flows. In 2017, sovereign funds completed 17 direct investments in emerging-market infrastructure, of which 10 were cross-border, for a total value of $3.8 billion versus 11 deals in developed markets totaling $4.2 billion. Although this is not a new trend, it has intensified over the last year.
While it might, on the face of it, appear to be a higher-risk strategy, emerging markets can carry lower potential political risks, as there are fewer concerns about foreign investment in infrastructure and SWFs can pair with a domestic promoter. Deals are often less complex, with fewer parties involved, and lower costs reduce third-party operating risk. As a result, emerging-market infrastructure can be more attractive than that in the United States, Europe and the Asia Pacific.
