Private equity infrastructure investment in emerging economies

  • Nijood Alnaseem

Student thesis: Doctoral Thesis

Abstract

The development of investment in infrastructure, along with the continuing attraction of Emerging Infrastructure Markets (EIMs) for global institutional investors, has been closely associated with the increased growth in Private Equity Infrastructure Funds (PEIFs). Emerging Infrastructure Markets (EIMs) are currently experiencing an increasing demand for infrastructure to support sustainable economic and social development. In the last decade, wholesale inadequacies in national government budgets has promoted, Emerging Infrastructure Markets (EIMs) to increase the scale of the private capital to support essential infrastructure. The scale of investment need coupled with the risk profile infrastructure opportunities within EIMs has attracted global Private Equity (PE) institutional investors with investment being channelled predominantly through the PEIF model in order to avail of specialist fund manager expertise and enhanced market opportunities.

This study examines the key challenges pertaining to global infrastructure investment within EMs. The research offers an assessment of committed infrastructure funding deals in EMs as a proxy for private infrastructure investment. In addition, there is an analysis of the growth pattern across twenty-three emerging countries of PEIFs within EMs, based on Preqin data for the period Q1-2009 to Q4-2019 (for deals) and Q1-2006 to Q4-2019 (for funding vehicles). Specifically, this segment of the research affords enhanced contextualization of the investment landscape and of the behaviour of global PE institutional investors in EMs, in order to answer the following four critical questions:

1. Who have been the key PE investors within EIMs?
2. What types of infrastructure deals tend to be targeted by global PE institutional investors in EIMs?
3. Which regions/countries in EIM are the majority of global institutional investors
choosing to invest?
4. Which are the most targeted infrastructure project styles1 within EIMs?

1 Refers to greenfield and brownfield project

The analysis reveals that EIMs are currently experiencing a significant wave of
transformative growth, which has prompted additional PEIF investment across the
period under examination. There has been an unprecedented growth of PEIF
investment in EIM , with the aggregate number of 2,519 infrastructure deals, with a cumulative value of $632,116.51 million (USD) in the period Q1-2009 to Q4-2019. In addition, the research has shown that from within the PEIF universe 853 infrastructure investment fund vehicles managed by 405 fund managers, with a cumulative fund of $682,364.83 million (USD), have invested in EMs, or countries/regions in EIMs. This study concludes that the development of infrastructure investment markets has been fuelled by a powerful need to engage global institutional investors and fund managers in EIMs to redress the shortfall in public sector financial capacity. The growth in PEIF investment meanwhile reflects the considerable opportunities that exist within EIM infrastructure investment markets for those investors willing to absorb and capable of effectively managing the associated risks of EIM infrastructure investment.

This research also highlights international challenges currently influencing PE
investment flows into infrastructure projects within emerging infrastructure markets. The interviews concerning investors’ experience and knowledge of infrastructure assets reveals that EM barriers generally curtail investment and heighten risks within EIMs, namely: 1) primary financial challenges perceived in EIMs encompassing currency rate risks (foreign exchange risks); payment model/ revenue model risks; bankability; liquidity; and credit rating risks; 2) principal political challenges pertains to unstable government risks (political instability); political influences; insurance of absence of political risks (guarantees); and level of corruption; 3) absence of regulatory and policy frameworks; 4) economic volatility and social challenges; 5) sectoral (technical/industry) difficulties.

The research nonetheless demonstrates that EIMs provide significant opportunities for global institutional investors to invest in economic infrastructure assets in EIM due to number of drivers. Firstly, EIMs ensure better access to deal flows and to capture future growth market opportunities. Additionally, EIMs offer for sector specialist investors EIMs offer scope for portfolio development and expansion with contrasting risk-return profiles whilst benefiting from their sectoral specialist knowledge. In addition, the high demand for infrastructure assets in the area of EIM (e.g. the needs for power energy sector –conventional power energy or renewable power energy- in South Africa and the needs for transport sector in Brazil).Thirdly, EIMs offer higher internal rates of return relative to developed markets entrants often able to benefit from ‘first mover advantages’ and the reduced levels of competition. Investor competence, robust due diligence along with the capacity to effectively identify, manage and off-set risk remain key fundamentals to the realisation of the infrastructure investment opportunities that EMs afford.
Date of AwardFeb 2022
Original languageEnglish
SupervisorMartin Haran (Supervisor), Peadar Davis (Supervisor) & Michael Mc Cord (Supervisor)

Keywords

  • Investment
  • Infrastructure investment challenges
  • Emerging markets
  • Financing
  • Infrastructure funds
  • Global private investors
  • Funds managers
  • Investment vehicle
  • Preqin

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