Most people that make their living in the investment and finance world are familiar with the phrase “flight to safety.” It means that when markets are volatile and prices are plunging, investors look to “safe harbors” in the storm, often lower-risk, core investments, and the safest of all are generally U.S. Treasuries or cash.
But have you ever heard the phrase “flight from safety”? Or, put another way, moving out the risk curve. When everyone wants to be in the perceived safe markets, and the competition for investments in those markets grows and leads to multiple bids and rising prices, then there is a point where the price paid for that safety becomes too much, and investors leave the market. The risk of paying too much becomes greater than the risk of missing out on buying what is perceived to be a safe, core asset.
There is evidence that a rotation like this is taking place in infrastructure markets.
For example, China’s sovereign wealth fund, China Investment Corp., made news recently by announcing it is shifting away from developed countries, and has begun a major push into emerging markets, including a focus on infrastructure assets in those markets.
According to reports, the change is being made in part because CIC perceives more value in emerging markets, where fewer participants are competing for investments and, therefore, prices are not being pressured upward.
And, in the past two weeks, Alinda Capital has decided to stop fundraising for its latest core infrastructure fund and shut it down while simultaneously launching a new infrastructure value added fund — a sign that perhaps the appetite for core infrastructure is indeed waning.
In a competitive marketplace like today’s, those with the ability to do so seem to be more willing to look outside core markets for a good deal, and one of the places CIC is reportedly targeting is Africa.
Most investors probably consider Africa to be a frontier market — further out on the risk curve than an emerging market — and one they would cross off their list of appropriate choices.
But does CIC targeting Africa mean the market is developing from frontier market into emerging market? It is probably not that easy to make a blanket statement about a market as large as Africa, but parts of the country probably have the same investment characteristics as what many investors consider to be emerging markets.
I know of at least one member of the Institutional Investing in Infrastructure Editorial Advisory Board who liked Africa as a contrarian investment. An investment in Africa may be going against the grain, but, as CIC seems to believe, the potential benefit is that an investor can find values because fewer participants are competing for assets and bidding up prices.
According to the Brookings Institute report Financing African Infrastructure, published in March, the African market for infrastructure investment has seen a surge in private external financing during the past decade, with private investment representing more than 50 percent of the increase in external financing for infrastructure. Moreover, the Brookings report notes that the composition of that external financing is changing: “During this period, while the level of ODF [official development finance] increased — especially from the World Bank and the African Development Bank (AfDB) — the dominance of ODF in infrastructure financing declined as private investment surged to over 50 percent of external financing, and China became a major bilateral source. The most striking feature of this surge is the changing share of financing offered by traditional and non-traditional partners and private sector sources, posing great opportunities as well as challenges for sub-Saharan Africa.”
At some point, like most developing markets before it, Africa will most likely shed its frontier market status and be considered an emerging market.
Perhaps CIC’s latest move into the country signals the beginning of that point in time.
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Drew Campbell is senior editor of Institutional Investing in Infrastructure.
