Like other parts of the world, Asia also requires significant capital in order to upgrade its infrastructure.
Andrew Tan in a detailed blog post has recently made the case for making strategic investments in the underserved middle market.
Back in 2018, the Global Infrastructure Hub, which is an initiative launched by the G20, released what remains the most “comprehensive” analysis to date of the planet’s “long-term annual infrastructure financing requirements.”
As noted in the update, it is currently estimated that between 2016 and 2040, US$97.2 trillion would be needed globally to “keep pace with profound economic and demographic changes, and to close infrastructure gaps,”
It added over half of that capital – US$50.7 trillion – was needed by Asia Pacific countries, while “highlighting that the current pace of investment would lead to a US$19.4 trillion shortfall by 2040.”
Analysis by others indicates that “insufficient” progress is being made to address the gap.
According to the Asian Development Bank (ADB), around $13.8 trillion of investment is needed in infrastructure and other real assets “between 2023 and 2030 to ensure Asia’s economic growth targets are met.”
Historically, around 90% of infrastructure in the region has been “funded by the public sector.”
However, as the ADB and other multilateral agencies including the International Monetary Fund have “repeatedly highlighted, increasingly “governments, central banks, financial supervisors, and multilateral institutions must coordinate and develop a comprehensive strategy to attract more private capital.”
In September of this year, Muzinich & Co. announced the launch of a new Infrastructure and Real Assets Private Debt Strategy in partnership with Hong Kong-based Orion, an asset manager backed by CK Asset Holdings Ltd (CKA).
Andrew Tan, Asia Pacific CEO and Head of Private Debt at Muzinich & Co., examines the opportunity in real assets private debt.
Andrew Tan explained that there are two main drivers.
Firstly, Tan said that Asia Pacific (APAC) region investors have “historically liked investments backed by physical assets, particularly real estate.”
But, Andrew Tan pointed out that given the challenges in certain parts of the commercial real estate market in the last couple of years, they felt there was a gap for a strategy that could ‘offer investors the downside protection of hard collateral, diversification and potentially attractive returns. ”
In their view, infrastructure and real assets can “meet that diversification need, providing investors with access to a broad range of sectors such as power and renewable energy, utilities, telecommunications and digital infrastructure, logistics-related infrastructure and energy transition.”
Andrew added that there are also various opportunities in the “built environment, in sectors such as student accommodation, care homes and hotels.”
Andrew explained that what ties these together is that “they are all hard assets with tangible value.”
The second part of the story is that in the “course of building up their Asia Pacific private debt platform, we were increasingly seeing deals that had an element of development risk, including a requirement for ‘last-mile’ financing to get projects or companies to the point where they would be cashflow generative.”
Here, Andrew Tan clarified that they “are not talking about large-scale infrastructure projects where governments or big companies are involved.”
Andrew Tan also mentioned that those deals are “high profile and there is a lot of capital chasing them from already established infrastructure players and private equity firms.”
In their view, more compelling opportunities “can be found in the next tier down – in the US$25 million to US$75 million range, where borrowers may find it difficult to access financing from traditional sources. These sorts of transactions were ineligible for our first APAC private debt vehicle, which was not designed to take on development risk.”
After identifying the opportunity, they also recognized the “need for the right technical and operational expertise of real assets.”
Andrew Tan also shared that the question then became how they might partner with a “credible institution with the prerequisite capability on the asset side.”
And that is how their tie-up with Orion3/CKA emerged.
They believe real assets have a “wide appeal.”
Andrew Tan further noted that from an institutional client standpoint, investors who have “typically allocated through private equity might find the opportunity to get exposure higher up the capital structure with downside protection as attractive.”
Andrew Tan added that they also believe they can provide diversification by virtue of the “size of companies and types of assets we are targeting.”