Entry prices for infrastructure assets in emerging economies are returning to much more “conventional and appropriate levels”, while equity return expectations have held steady in the last 12 months, according to Alasdair Maclay, a director at emerging markets private equity firm Actis.
The credit crisis has reversed a trend in rising asset prices that was in part caused by more investors, particularly US and European funds, looking to emerging markets for higher returns, he told delegates gathered at this week at PEI's Infrastructure Investor Forum in Berlin. Maclay said emerging market bond premiums had climbed from about 10,000 basis points (10 percent) seven years ago to about 120 basis points (1.2 percent) over US treasuries in 2007. Bond prices and yields move in opposite directions.
“We're now looking at a pipeline of deals in all of our regions, from Africa to Asia, where the price looks right for the first time in three years,” Maclay said.
Despite lower entry prices, the firm doesn't expect its equity returns to fall.
“Our cost of equity has not changed in that time. We were a 20 percent IRR infrastructure fund four years ago and we will be in four years' time,” Maclay said.
Actis' return expectations have held steady in the last 12 months since the firm is able to pursue financing structures in emerging markets infrastructure deals in which its base case is a 20 percent IRR.
“We have a power station in Tanzania where the equity is essentially ranked higher than the debt,” Maclay said. In the event of a reorganisation, Actis negotiated protections which enable it to have its equity paid out before the debt holders.
The firm expects to be a net buyer of infrastructure assets in the near term in hopes of capitalising on the downturn in asset values.
“We're not sellers right now. We think the market will recover,” Maclay said.
The UK-based private equity firm is a long-time investor in the emerging markets. Late last year it closed its third emerging markets buyout fund on $2.9 billion and is forging ahead on plans to close a $1 billion emerging market infrastructure fund by the end of the first quarter of 2009, according to local media reports of remarks by the group's Africa head, Peter Schmid.