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SWFs show growing interest in emerging market infrastructure

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Sovereign funds are increasingly showing an interest in emerging market infrastructure, with an overweight to the specific asset class when compared with overall regional exposure.

According to a survey of 50 sovereign wealth funds (SWFs) conducted by Invesco, the asset owners – worth more than $7trn (€6.3trn) – are showing an “affinity” for emerging markets, while their exposure to developed market property is also higher than their overall exposure to the same regions.

The asset manager’s third annual Global Sovereign Asset Management Study found that many of the risks associated with investing in emerging markets – such as corruption, regulatory risk and inadequate legal protection – fell away when investing in infrastructure.

“Infrastructure is perceived as reducing all of these risks to some extent because, in general, they are mitigated by government support,” Invesco said.

It found that the portfolios of sovereign wealth funds had a 17% exposure to emerging market infrastructure, whereas only 9% of overall assets were held in the region.

“Secondly,” Invesco said, “the supply and demand dynamics in emerging markets are more attractive to sovereigns than both developed market infrastructure and different classes of emerging market alternative investments.”

Similarly, when investing in property, 73% of all real estate assets were in developed markets compared with a 56% exposure across portfolios, mirroring the overweight seen in infrastructure.

Sovereign investors face the same challenges when investing in real assets, with the cost of assets and the competition for them causing concerns.

“However, for both infrastructure and real estate investments, the biggest challenge for sovereign investors is sourcing deals”, which Invesco said was a concern for 53% of respondents.

The sourcing of deals, according to the survey, is hardest for infrastructure assets, with those SWFs with more than 5% exposure to the asset class often working with other sovereign investors and, on average, reporting nearly three collaborations with other funds.

Nick Tolchard, chair of Invesco’s global sovereign group, said the trend towards collaboration had been evident in last year’s survey.

“However, in 2015, the collaboration appears to be taken further by certain sovereigns that are developing infrastructure propositions significantly to target other sovereigns,” he said. 

“Many sovereigns we surveyed felt this to be a logical evolution, since those that are established are best placed to help emerging sovereigns enter new alternative asset classes.”

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