Putting a spotlight on infrastructure investing
No doubt the large trading houses such as Mitsubishi Corp., Mitsui & Co., Itochu, Marubeni have considered developing-, owning- and operating infrastructure assets such as oil- and gas pipelines, power stations or transportation assets part of their core business for a very long time. Typically these investments are made for business reasons, for example a strategic move in the energy sector from downstream sales and distribution towards more upstream activities, rather than pure investor-driven financial reasons.
Because, over time, investing into infrastructure has increasingly taken the form of closed-end commingled funds run by professional investment teams well-versed in the intricacies of the various sub-areas of infrastructure, the trading companies have recognised the potential for cooperation with these purely “financial” players in the space. Mitsubishi in 2011 famously teamed up with Global Infrastructure Partners, a fund sponsored by Credit Suisse and General Electric and owner of such trophy assets as the London City Airport, Gatwick Airport and the Port of Brisbane, seconding staff and gaining access to co-investment rights. Mitsui & Co., already in 2008, partnered with Australia’s Challenger Financial Service Group in a joint venture managing an Asian closed-end infrastructure fund. The aim in both instances is to leverage off the in-house capabilities present at the trading companies and obtain synergies between the investor-angle and the servicer/operator-angle.
Infrastructure (fund) investing by Japanese institutions solely for financial objectives is a more recent occurence. The larger bank- or insurer investors might have tip-toed into the asset class as it developed in the 1990s when the first closed-end funds started investing in what were then mostly Australian and UK domiciled assets but Japanese pension funds have been relatively late to the party. While peers in countries such as Canada, The Netherlands, Australia and the UK found their way into the infrastructure asset class, attracted by the unique risk-return features of strong income generation from businesses providing vital services to the economy often enjoying high barriers to entry, Japanese pension funds have by-and-large taken a wait-and-see attitude. They are unwilling to lock-up funds for the typical 10-12 years or unconvinced of ultimate successful exit (onward sale of the asset by the fund) from investments.
The announcement in April therefore of Japan’s Pension Fund Association (PFA) leading a consortium of Japanese institutions in the establishment of what would be the largest infrastructure fund in the world can be considered a watershed event. The transaction is driven by the Ontario Municipal Employees Retirement System, Canada’s $55bln public scheme, which commits $5bln to a new fund called the Global Strategic Investment Alliance. PFA will invest $1.25bln and another $1.25bln is chipped in by a group of Japanese institutions including Mitsubishi, Mizuho Corporate Bank and the Japan Bank for International Cooperation. The fund will start at $7.5bln with the ultimate aim to reach $20bln and invest in assets in developed markets of Europe and North America.
Meanwhile developments towards more infrastructure investment opportunities domestically also received a boost. After lengthy negotiations and lobbying by the industry, a government panel announced the details of the tariff for renewable energy production in Japan. Solar power will fetch 42 yen (53 US cents) per kilowatt hour of energy production under a guaranteed off-take arrangement effective for 20 years. Wind energy was also incentivised with a 20-year tariff of 23 yen per kilowatt hour. Small scale hydro, geothermal and biomass will be supported as well, all effective from July this year. This finalisation of the legislation is expected to trigger an investment boom and already some funds have been launched in anticipation of a favourable tariff regime.
Tokio Marine & Nichido Fire Insurance´s asset management subsidiary, in a first-mover effort, has announced the establishment of a Japanese solar fund and has actively been engaging pension fund investors to join their fund to capture the high and stable cash-flows underpinned by the tariff on electricity production. Although the jury is still out on whether this fund will be successful, it appears natural to think that pension funds can help fund Japan’s shift from nuclear to renewable energy because of the long term nature of their liabilities but also their need to generate substantial income from their investments as their members are aging and benefit payments start to exceed contributions.
For the time being however the largest fund flows into Japanese renewable energy production have come from the old guard power companies and a new breed of entrepreneurs represented for example by Masahiro Son, the billionaire founder of Softbank. After making his fortune in IT (Softbank owns Yahoo! Japan) and telecom (Softbank famously acquired Vodafone´s Japanese wireless business in 2006), Son has now become the most outspoken and vocal supporter of break away from nuclear towards a renewable energy future for Japan. His investment vehicle SB Energy Corp is building mega solar plants across the country in an effort to break the grip of the utilities companies on the power generation and distribution business. Panel makers such as Sharp and Kyocera are also expected to join the bandwagon and move ‘downstream’ into the development and construction of solar projects as upstream production of solar panels is facing increased competition from Chinese manufacturers.
It will probably be a long time before a privately financed domestic infrastructure industry has developed to the degree that a mammoth investor such as PFA is comfortable in allocating its infrastructure investment budget to domestic rather than foreign assets, but at least recent developments bode well.
Oscar Volder, CFA, is Head of Institutional Sales at BNP Paribas Investment Partners Japan in Tokyo.