Digital infrastructure assets: is Asia the next big opportunity?

Institutional investors have traditionally been cautious of infrastructure plays – they’re difficult to assess, difficult to exit and the returns, while reliable, are often slow.

Infrastructure assets in Asia, meanwhile - with its higher operational and political risks - have been met with even less enthusiasm by investors. However, all of that could change as digital assets and infratech attract the attention of institutional investors.

Speaking at AsianInvestor’s Infrastructure Investing Forum 2022, Pramod Vijayasankar, principal investment officer, financial institutions and syndication at the Asian Infrastructure Investment Bank, said that innovative approaches in India were attracting a new breed of asset owners to infrastructure assets.

EQUIPPED FOR RISK

“Part of the problem of infrastructure and institutional investors was that when you look at greenfield assets the risks are complex and the construction risks are not things that institutional investors are equipped to deal with,” he said.

He said that a lot of the innovation in markets such as India had been about attracting investment into operating assets and that regulatory frameworks that were making it more conducive for institutional investors.

“The regulatory framework in India requires that only operating assets with one or two years track record are able to tap institutional capital both on the equity and debt side and that’s proved to be quite successful, it’s raising capital at scale and we’re seeing both international and domestic investors active in this segment.”

Digitalisation, he said, was now becoming a big theme in these markets and that the Asian Infrastructure Investment Bank had made some solid investments in this segment.

“A transaction that we’re particularly proud of is a $150 million debt investment into an Indonesian satellite that will provide broadband connectivity across Indonesia,” he said.

“These are the type of transactions that a multilateral bank like ourselves needs to do because there are risks that many investors are not equipped to assess and take on.”

UNIQUE STRUCTURE

He said the project involved a capital expenditure of more than $500 million where all of the capacity was taken by the Indonesian Ministry of Communications.

“It was a unique transaction because normally satellite transactions have a lot of market risk but the way we had structured this financing it had involved all of the capacity of the satellite being off-taken by the government.

“This allowed us to structure really attractive financing terms for the operator.”

The other transaction undertaken by the bank was an investment into a specialist data centre fund which will see data centre opportunities across the region especially in South East Asia.

“We’ve also made small investments into Infratech in China which is a nascent sector but we’re increasingly seeing the use of smart devices in traditional infrastructure be it sensors that improve O&M for toll road operations.

“We’re increasingly seeing traditional infrastructure adopting smart technologies to improve the overall asset quality.”

ON MATURE REFLECTION

Dennis Chan, head of infrastructure at Ping An Overseas Holdings, another panelist at the forum, said that the difficulty in assessing these assets was reducing as the technology was becoming more mature.

“The technology now is very mature whether you talk about the telecom space, the data centre space or the smart energy – it’s always been quite popular in Europe in the retail residential customer space.

“If you go into Asia, if you take China as an example, smart energy in terms of multiple sources of energy, is geared more towards the industrial user but this too is changing.”

Balancing macro risks such as inflation, he said, was a matter of choosing the right players in the right sectors.

“Whether it’s the data centre space or the renewable space it’s about looking at the major players even if there is a very high valuation it will usually de-risk over time and that gives you, along with the development gains, a higher ROE that will mitigate the inflationary risks in terms of the raw materials,” he said.