InfrastructureAn Overview of Trends in Select Sectors and Markets April 2009 Sector Snapshot nfrastructure is among the sectors poised to benefit during the global financial Estimated Annual Emerging Markets crisis. Private investment will play a growing role over the medium term, as gov- Infrastructure Spending 2008–2011 ernments in emerging economies look to leverage trade surplus-derived reserves I Country/Region Projected Ann. into stimulus spending focused in large part on sorely needed and long overdue infra- Spending (US$B) structure investment. Recently announced stimulus packages across several larger China 725 emerging markets include spending plans averaging US$20 billion annually over the GCC 400 next 3-5 years. According to Merrill Lynch, infrastructure expenditure (public and pri- Russia 325 vate) in the emerging markets is projected to grow by 80% over the next three years, India 240 with an estimated US$2.2 trillion to be spent annually. China, the Middle East and Brazil 225 Russia account for 70% of the projected total. Mexico 120 Governments are increasingly seeking private capital via partnerships (public-private Turkey 65 partnerships, or PPPs) to lower their risk exposure and maximize returns on taxpayer South Africa 60 dollars. Private equity investors are not only pursuing these newly available project Eastern Europe 45 development and finance opportunities, but also injecting a growing pool of capital Total EM Sampling 2,205 into infrastructure-related sectors—particularly trade (e.g., ports and logistics), com- Source: Merrill Lynch munications (e.g., cell phone towers), engineering & construction, and utilities (e.g., continued on page 2 Investment Commitments to Infrastructure with Private Equity Funds Raised for Infrastructure, Private Participation in Emerging Markets, Emerging Markets vs. Developed Markets, 2003–2007 (US$B) 2005–Q1 2009 (US$B) 200 35 30 150 25 20 100 US$ Billions 15 US$ Billions 10 50 5 0 0 2003 2004 2005 2006 2007 2005 2006 2007 2008 Q1 2009 Africa Middle East LatAm & Carib. CEE & CIS EM Asia Developed Markets Funds Emerging Markets Funds Source: World Bank PPI Project Database. Note: Reflects total public investment Source: EMPEA, Preqin, Probitas Partners. that includes private investment component (e.g., partnership). © 2009 Emerging Markets Private Equity Association 1 EMPEA Insight: Infrastructure April 2009 Comparative Infrastructure Indicators for a Sampling of Emerging Market Countries, 2009 Electric Power Access to Access to Treated/ Access to Sanitation Total Telephone Consumption Electricity Clean Water Services Subscribers* (kwh per capita) (% of population) (% of population) (% of population) (per 100 inhabitants) China 987 99% 77% 44% 57 India 380 43% 86% 33% 13 Indonesia 411 53% 77% 55% 27 Egypt 1,073 94% 98% 70% 34 South Africa 3,860 66% 88% 65% 82 Mexico 1,660 NA 97% 79% 62 Brazil 1,776 95% 90% 75% 68 Russia NA NA 97% 87% NA Average for Upper 2,621 83% 92% 84% 88 Middle Income Countries Source: World Bank and Public-Private Infrastructure Advisory Facility (PPIAF), PPI Project Database. *Telephone subscribers include fixed line and mobile users. water treatment, power generation and distribution). Private Capital Raised by Infrastructure Focused Private equity fundraising for infrastructure investment in emerging Equity Funds, by Geographic Focus, 2008 markets grew 147%, from US$3.4 billion raised in 2007 to Asia US$8.4 billion in 2008; capital raised by developed market Multi-regional funds fell 26% during the same period, from 2007’s total of US$27.9 billion to US$20.5 billion in 2008. Governments Middle East alone are unlikely to supply the entire US$7 trillion to be CEE & CIS spent in emerging economies over the next three years, leav- LatAm & Carib ing a clear role for private equity to help fill the gap between Africa capital supply and demand. Source: EMPEA. / Note: Includes all funds with closes in 2008. EMPEA Insight Editorial Director Jennifer Choi [email protected] Fundraising and Writing and Research Alexander Adrian [email protected], Harri- son Moskowitz [email protected], Holly Freedman freed- Investment Trends [email protected], Nadiya Satyamurthy [email protected] Infrastructure is one of the fastest growing sectors for private Production Manager Cristiane Nascimento [email protected] equity funds focused on the emerging markets. Along with a Advertising Opportunities number of dedicated infrastructure vehicles launched since EMPEA Insight offers readers an overview of the data and drivers 2007, the majority of generalist emerging market private eq- behind investment trends in emerging markets private equity. Each issue of EMPEA Insight provides an opportunity for a single uity funds now include infrastructure sectors in their invest- exclusive back page advertisement. Issue-specific placements are ment mandates. on a first come, first served basis. For a list of upcoming issues In 2005, only US$5.2 billion was raised globally for infra- and more information about advertising opportunities and rates, contact Cristiane Nascimento at [email protected]. structure funds. By 2008, that number had grown more than About EMPEA five-fold to US$28.9 billion. Funds raised for emerging market . The Emerging Markets Private Equity Association is a broad-based infrastructure opportunities nearly quadrupled from US$2.3 membership organization founded in 2004 that focuses on the billion to US$8.3 billion during the same period, due both to emerging private equity markets of Africa, Asia, CEE, Russia/CIS, the rising number of specialist vehicles as well as the growing Latin America, and the Middle East. sizes of the funds coming to market. continued on page 3 2 © 2009 Emerging Markets Private Equity Association April 2009 EMPEA Insight: Infrastructure According to industry source Preqin, 27% of the infrastruc- ture private equity funds worldwide that closed in 2007 and Asia 2008 were raised by first-time fund managers, and 42% by Asia drew the most capital for infrastructure in 2008, with fund managers new to infrastructure. Among the 210 emerg- 11 funds raising a total of US$4.7 billion, representing over ing market funds that raised capital in 2008, 29 funds were half of the total raised by infrastructure-focused funds for the targeting infrastructure, including 18 specialist funds and 11 emerging markets. According to Merrill Lynch, Asia also repre- funds with infrastructure as a primary or secondary focus. sents the largest portion of projected infrastructure spending among emerging economies, with India and China together Recently closed emerging market infrastructure funds aver- accounting for US$965 billion, or 44% of the total projected age approximately US$400 million, compared with US$1.6 over the next three years. Areas of particular need in Emerg- billion among global infrastructure funds; however, fund siz- ing Asia include power, water treatment and sanitation, and es in emerging markets are catching up. On average, emerg- telecommunication infrastructure. ing market infrastructure funds in the market in 2009 are targeting US$1.2 billion, driven by a number of funds with Even at lower GDP growth in 2009—currently, projected at fundraising goals exceeding US$1 billion. Globally, an es- 5–6%, down from 9%—China’s electricity capacity growth re- timated US$102 billion is being raised for infrastructure in quirements are estimated at roughly 8–10% annually, or the 2009, with emerging market funds accounting for as much equivalent of building the UK’s electricity system each year as US$30 to US$40 billion of that collective target. for the foreseeable future. Between 2008 and 2010, China is expected to increase its power generating capacity by 40%, Investment by private equity firms in infrastructure projects on top of an 80% increase in capacity between 2000 and and related sectors in emerging markets totaled at least 2008. While the Chinese government currently limits foreign US$3 billion in 2008, based on EMPEA’s sample of 59 deals. investment in conventional power generation projects related The appetite for infrastructure investments is expected to to construction and operation of its power grid due to national grow in 2009, as infrastructure asset prices continue to fall security concerns, alternative and renewable energy, particu- from bubble levels and as governments further refine and roll larly wind power generation, is emerging as a sector where out PPP programs. In addition, infrastructure is one of the foreign investors have been able to establish a foothold. few sectors for which bank financing remains accessible— often through local banks unaffected by the global financial Pan-Asian infrastructure specialists seeking investment op- crisis. Fund managers report that infrastructure deals are portunities on the mainland include JP Morgan’s US$1.5 bil- still comparatively easy to finance, although investments in lion Asian Infrastructure & Related Resources Opportunity infra-related operating companies (rather than projects or as- Fund and the recently launched US$1 billion Standard Char- sets) still require little to no leverage. tered IL&FS Asia Infrastructure Growth Fund. A number of government-sponsored industrial investment initiatives are Distribution of Projected Global Infrastructure also supplying the sector with capital—for example, the China Spending, (2005–2030), Total Approx. US$40 Trillion Science and Merchants Capital Management Fund. China- dedicated generalist vehicles with an active infrastructure in- Water