It was another stimulating week at the Infrastructure Investor Network’s Seoul and Tokyo Forums.
The plenary halls and networking areas were buzzing and sentiment was positive at our largest infrastructure events in the Asia-Pacific region to date.
It continues to be evident that Japanese and Korean investors are increasingly attracted to infrastructure as an asset class, finding space for it as part of larger allocations to alternative assets more generally.
Here are four things we learned:
1. On digitalisation, decarbonisation, deglobalisation… and duty
Infrastructure is entering a “new golden age”, according to former CIOs of some of Korea’s top LPs at our Seoul Forum last week, in a panel that shed light on how the country’s institutional investors consider portfolio building.
Teachers’ Pension former CIO Kyuhong Lee said understanding the megatrends of digitalisation, decarbonisation and deglobalisation should be both a core competency and a key mission of investors – but those wanting to build diversified portfolios would need to balance such trends against more pessimistic “old economy” assets, such as cash.
“Even the most competent investment manager can be wrong about the future,” he said. “It’s important that we do have a buffer to respond to any unexpected situation.”
However, Changhoon Lee, former CIO of Government Employees Pension Service also had a message for the LPs in the room: “Keep doing investments.”
He said this is a better approach than holding on to cash, considering that the “duty” of LPs is to put other people’s money to work.
As for GPs, Changhoon Lee said whatever difficulties they might encounter, their duty is to put the priorities of LPs first.
2. Japanese LPs like to ask questions
Meanwhile, Japanese LPs still crave information about the fund managers and strategies they are considering investing in.
So said Ark Totan Alternative CEO Tuck Furuya at the Infrastructure Investor Network Tokyo Forum. When asked about a trend toward GPs scaling up their operations, either through increasing fund sizes or acquiring other specialist investment firms, Furuya said he is all for expansion – provided it is well balanced and does not lead to strategy drift.
As a gatekeeper, he said it is important to understand a GP’s entire portfolio and their past performance, and for this reason, he asks a lot of questions.
Furuya said the information GPs provide is often inadequate, so he sends long letters of inquiry that are sometimes, by his own admission, “too long”.
He said GPs are initially very receptive, but after “pages and pages” of questions, can become “cold”.
However, he said it is important to understand not only GPs’ results but also their procedures – especially when the investments they are making are half a world away.
3. Secondaries reaching primacy?
Alistair Ray, partner and CIO at Dalmore Capital, discussed a particular set of circumstances in Europe that is leading to increased opportunities for savvy investors, including those from Japan and Korea, to get access to infrastructure fund stakes at a discount via secondaries transactions.
“In the UK and Europe, a lot of the capital has come from defined benefit pension funds. These have been closed to capital for a considerable period and are now in rundown mode. So, they’re looking to move out of alternatives and illiquids, and into [assets like] gilts or long-term debt instruments,” he said.
Many of these funds have assets larger than their liabilities following recent macroeconomic movements – which combined with the former leads to a willingness to take “reasonable” discounts on fund stakes.
“That’s meant there is a market of many more sellers than buyers, which is very attractive,” Ray said.
However, he added that the market still has a lot of potential to grow and isn’t actually as big as it could be, thanks to this lack of willing buyers. “I’m amazed there isn’t more interest in this space and more investing in it, because I think the returns are fantastic for the risk,” he said.
4. All about yield
Japanese LPs’ particular desire to see infrastructure assets that provide a strong yield also came up during the secondaries panel in Tokyo, with Toru Masuda of Sumitomo Mitsui Trust Bank emphasising that this was a major consideration when weighing up either primary or secondary commitments.
Shigefumi Kuroki of DBJ Asset Management echoed this, adding that secondaries could be an especially good way to access yield for Japanese LPs as they are buying into a fund stocked with operating assets that already have a track record of performance.
Of course, the same logic applies to investing in open-end fund vehicles, as several GPs said to us in conversations on the sidelines, with many finding good traction at being able to point to an existing diversified portfolio that Japanese LPs can get their heads around, as opposed to convincing them to make a blind-pool commitment.