LP interview: Asian Infrastructure Investment Bank

When assessing the infrastructure funding gap in emerging markets, it’s not uncommon for multilateral development banks (MDB) to settle on a figure of around $1 trillion a year. That sounds like a lot until one of them evokes industry estimates that aggregate capital held by institutional investors globally is set to top $100 trillion by 2020. 

In some ways, the more astronomical the data points, the more likely they are to be dismissed as slideshow zingers rather than embraced as part of a concrete investment strategy. But for the Asian Infrastructure Investment Bank (AIIB), a China-based MDB, these heady figures illustrate the challenges of the developing world’s modernization. They are a sobering and practical call to action, especially in the private sector.  

Greenfield project funding in AIIB’s member countries – most of which are emerging markets – came to $173 billion in 2017, but less than $7 billion of that came from institutional investors. In response, the group recently made private capital mobilization a top priority, formalizing a go-forward strategy in the sector and lifting its private co-financing commitments from $5 million in 2016 to $566 million last year. 

“If you look at the pool of capital that’s being managed by institutional investors, it’s huge, but almost none of those asset managers focus on emerging market infrastructure as an asset class,” says Najeeb Haider (pictured), AIIB’s principal strategy officer. “Our hope is to bring in more of the few private equity players that are interested in emerging market infrastructure by demonstrating that we can execute some interesting deals in that sector.”

Broad remit

AIIB was founded in January 2016 with 57 member countries and has since expanded to 87. Although sometimes framed as a kind of policy bank for China’s Belt & Road initiative, the MDB trumpets an even broader mission statement, including relatively geography agnostic mandates in sustainable infrastructure and cross-border connectivity. It has $100 billion in committed capital, while funded capital ready for deployment now totals $12.6 billion. 

Private sector activity represents only 32% of lending and is mostly limited to co-financing with other MDBs. A long-term plan to build up a track record of independently led deals, however, is starting to bear fruit. Recent examples include a $240 million loan to Oman Broadband, a telecom operator that was struggling to inspire confidence with private investors until AIIB led the charge. 

“Not only to do we see the need for infrastructure rising, we see the budgets of our members being constrained in terms of providing sovereign support to all the projects that they need to get done,” says Haider. “So, we do need to focus on the private sector as much as we can, especially in our emerging markets where the pressure on governments and infrastructure requirements is tremendous.”  

Fund commitments to date amount to $400 million, including $150 million for an India-focused vehicle managed by Morgan Stanley, $150 million for the IFC Emerging Asia Fund, and a $100 million contribution to India’s National Investment & Infrastructure Fund. The latter is still being finalized. 

“We’ve decided to work through funds because it allows us to reach a wider base of transactions than we would otherwise be able to reach at this stage in our lifecycle with one office in Beijing,” says Haider. “Most of our balance sheet will be debt, but since the need for equity is becoming more apparent, we will need to have a strategy around that as well – and we’ve been very successful in deploying equity capital through funds so far.”

Early progress

Although activity to date has mostly been a matter of early-stage brand and capacity building, it has resulted in substantial practical progress, including 28 approved projects across public and private markets. AIIB has also signed knowledge-sharing agreements with most of its global peers and is actively hiring with a view to position itself as an MDB with an entrepreneurial spirit. The idea is that emerging markets infrastructure requires a fair dose of first-mover moxie. 

The current team numbers only about 165, but the smallness has demonstrated some advantages. Unlike most MDBs, teams focused on the private sector and sovereign-related deals work off a single balance sheet, increasing internal fluidity of talent and speeding up project delivery. This agility is also seen as supporting the versatility needed for work in frontier markets as well as offering a theoretical innovation advantage. 

“We could play a role in the MDB ecosystem where we prove the effectiveness of a certain approach and then spread it to our larger peers,” says Laurel Ostfield, AIIB’s head of communications. “That kind of sharing is needed for very social missions and it’s the difference between the MDB world and commercial banks – there isn’t that competitiveness.”

AIIB aims to leverage this context for the next few years with a view to graduating from co-financing with other MDBs to originating more standalone deals, and ultimately jumpstart entirely new investment markets. The plan is to make certain kinds of projects bankable in areas where no such transactions have been attempted before, thereby generally improving confidence in emerging markets infrastructure among institutional players. The hope is that as the AIIB name achieves recognition, deal flow will open up and Asia’s much needed bridges and roads will follow suit. 

“Some of our members don’t have a track record of doing infrastructure finance in the private sector, so we would like to help them formulate plans that they can implement with us,” says Haider. “We haven’t gotten to that stage yet, but once we’re established, we want to engage in broader discussions about infrastructure requirements and replicate previous successes financing them without having to bring sovereign credit into the picture.”   

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• Topics
• LPs
• Infrastructure
• Fundraising
• Infrastructure
• Greater China
• South Asia
• Asian Infrastructure Investment Bank
• India
• China