Powering Up: Sovereign Fund Investment in Infrastructure Since 2007

May 13, 2013 by Loch Adamson

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AS THEY SEEK to protect their portfolios from the threat of future inflation, sovereign wealth funds are pouring money into infrastructure investments — and rapidly diversifying their risk exposure. This trend is welcome for both Western governments with tight budgets seeking to upgrade their aging infrastructure and rapidly growing emerging-markets economies that require additional capital to expand basic services. With their deep pockets and relative freedom, sovereign wealth funds are increasingly important as one of the last remaining sources of unconstrained capital in this sector. Traditional providers of long-term finance, such as investment banks and pension plans, are adopting more-conservative profiles as a result of increased regulation, rising numbers of retirees and falling interest rates.

Yet an analysis of sovereign wealth fund investments in foreign infrastructure since 2007 suggests that the funds are cautious, focusing on assets in developed markets. Moreover, sovereign funds face politically motivated barriers to investing in infrastructure, particularly in the U.S. Consequently, they have increased the number of infrastructure funds in which they invest, to gain access to infrastructure assets in emerging markets.

SWF Direct Investment in Foreign Infrastructure Assets, by Fund, 2007-H1 2013



Infrastructure is a relatively new asset class for sovereign wealth funds. Two established funds — Government of Singapore Investment Corp. (GIC) and Abu Dhabi Investment Authority (ADIA) — defined their infrastructure strategies as recently as 2006 and 2007, respectively, while younger, more assertive funds — China Investment Corp. (CIC) and Qatar Investment Authority (QIA) — started investing in the asset class in 2010. Given that sovereign funds are relatively inexperienced direct infrastructure investors, they have typically invested in low-risk assets such as established, market-dominating power and gas distribution networks and water utilities in developed markets where there are strong and stable regulatory regimes. Such assets may provide the funds with steady long-term returns that have historically been uncorrelated with publicly traded assets such as stocks and bonds.

SWF Direct Investment in Foreign Infrastructure Assets, by Market and Sector, 2007-H1 2013


Although Western governments have largely welcomed and in some cases actively courted sovereign fund investment in infrastructure, the funds have shied away from assets that might appear strategic. For example, sovereign wealth funds have made relatively few investments in communications infrastructure investing abroad, with the notable exception of CIC’s 2012 acquisition of a 7 percent stake in Paris-based satellite provider Eutelsat Communications.

Perhaps most striking is the gap in sovereign funds’ investments in the energy supply chain. According to Sovereign Wealth Center data, over the past three years sovereign funds have invested heavily in commodity producers and in power and gas distribution networks. Sovereign Wealth Center has recorded a total of $6.2 billion worth of investment in electricity distribution assets in developed markets and $3.4 billion in gas pipelines since 2007. However, sovereign funds have invested relatively little in power generation in developed markets: a mere $2.1 billion since 2007, barely a fifth of their combined investment in electricity and gas distribution in these countries. This probably does not reflect an inability to source appropriate investments. Rather, it seems that public and government concerns about selling so-called strategic assets to foreign governments are deterring sovereign funds from investing in these assets.

SWF Direct Investment in Foreign Infrastructure Assets, by Region, 2007-H1 2013


Consider the recent decline in sovereign fund investment in U.S. infrastructure. Until 2011 most of sovereign funds’ investments in developed-market power generation had been in the U.S. The only other investments were the participation of Kuwait Investment Authority (KIA) in the French government’s capital-raising for nuclear power giant Areva in 2010 and QIA’s 2011 acquisition of 2 percent of Lisbon-based EDP Energias de Portugal, which operates extensive power-generation assets in Latin America. In 2012, however, Sovereign Wealth Center recorded no direct sovereign fund investment in U.S. infrastructure. Why the sudden stop? CIC’s CIO, Gao Xiqing, may have touched on the reason at the 2013 Boao Forum for Asia in April when he said that for his fund "there have been quite a few cases where the U.S. says 'go away.’?" Gao also said the U.S. should follow the European example and build public projects with extenal financing, suggesting that the country should be more welcoming to sovereign fund capital.

SWF Direct Investment in Infrastructure Funds, 2007-H1 2013



Sovereign wealth funds have stepped up their commitments to infrastructure managers since 2009. Sovereign Wealth Center data shows that sovereign funds made three times more commitments to infrastructure funds in 2011 than they did in 2009. (Although the total number dropped in 2012, it appears to be picking up again in 2013.) These commitments have a wider geographic spread as sovereign funds seek to benefit from growth in emerging markets. That these institutions prefer to invest in emerging-markets infrastructure through pooled funds is indicative of their inexperience in the sector and their need to leverage the expertise of infrastructure managers to source and operate these assets.

Until recently, the infrastructure sector has been the province of a select few: ADIA, CIC, GIC and QIA have accounted for 82 percent of all direct sovereign fund investment in foreign infrastructure assets since 2007. The market is attracting new entrants, however. In November 2012 the Kuwait Investment Office, the London branch of KIA, announced that it would start investing directly in infrastructure, and in May 2013 it formed a consortium with Canadian investor Borealis Infrastructure — an arm of the Ontario Municipal Employees Retirement System — and the U.K.’s Universities Superannuation Scheme to launch a £5.3 billion ($8.1 billion) bid for FTSE 100-listed water company Severn Trent. Provided that governments remain open, the future for infrastructure asset owners seeking sovereign fund investment appears to be bright.


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