A new International Finance Corporation (IFC) study shows that its long-term investments in infrastructure projects in emerging markets have outperformed the S&P 500.
The findings suggest that investors may be overstating the risks in these jurisdictions, with the IFC saying the perceived risk-return profile is “more pessimistic than warranted”.
The research adds impetus to calls for banks to be freed from the regulatory burdens that they argue are limiting their investments in infrastructure projects in Africa.
The continent, which has some of the world’s fastest-growing economies, is grappling with a debilitating $85bn annual infrastructure financing gap, limiting growth and opportunity.
The research note by the IFC, the investment arm of the World Bank and the largest global development institution focused on the private sector in developing countries, found infrastructure financing in emerging markets presents a compelling investment case.
“Uninformed views on the risk-return profile of investing in developing economies may be more pessimistic than warranted by the actual track record of emerging market investments. Better information and transparency can thus help,” the research note said.
“If data analysis reveals that actual returns exceed uninformed perceptions about risky emerging market investments, foreign investors may become more favourably inclined towards investing in these markets.
“Making private equity investments in emerging market infrastructure alongside IFC, a global investor would have achieved, on average over the long run, a better return than holding the S&P 500 and a better return than the MSCI EM index.”
The study was conducted by economists and finance experts Anusha Chari, a professor at the University of North Carolina; Peter Blair Henry, a senior fellow at Stanford’s Freeman Spogli Institute; and Paolo Mauro, a director of the economic and market research department at the IFC.
Making private equity investments in emerging market infrastructure alongside IFC, a global investor would have achieved, on average over the long run, a better return than holding the S&P 500 and a better return than the MSCI EM index.
— International Finance Corporation study
It looked into the performance of equity stakes in emerging market infrastructure ventures backed by the IFC over the past six decades, comparing these investments with portfolios of publicly listed equities.
This was done, according to the IFC, by using a public market equivalent calculation which considered all money invested in the private fund (contributions) and all money received back (distributions).
Specifically, the public market equivalent discounts these cash flows, using as the discount rate the public market return over the same period of an index such as the S&P 500, the IFC said.
Business Day reported earlier this year that the B20 South Africa finance and infrastructure task force made a big push for the relaxation of Basel III capital requirements in a bid to give banks more room to invest in infrastructure projects to reignite Africa’s economy and integration.
Standard Bank Group CEO Sim Tshabalala, who chaired the task force, said in an interview with Bethan Charnley, a principal at international management consulting firm Oliver Wyman, that there is an argument to be made that the risk-weighted assets and the capital held by banks in terms of Basel need to be changed to be consistent with the “actual risk” associated with project risks.
He said these would lead to banks’ lending more to finance much-needed infrastructure on the continent, whose prospects are inextricably linked to those of major South African banks.
“Globally, there is a strong view that there has been enough regulation and that regulators we pray are putting the pen down.
“There is another view, which we have had to try to reconcile with, which says that global micro-prudential regulations are drafted in a way that was addressing a set of problems that didn’t exist in emerging markets, particularly in Africa.
“And one of the set of regulations relates to the capital required for projects and indeed the capital required for banks to take on multilateral and development finance institutions, with the result that we hold more capital for these projects and for these institutions that is consistent with the risk.”
The Bank of England last week cut the amount of capital it estimates lenders need to hold in a bid to boost lending and to stimulate the economy — the first such move since the 2008 global financial crisis.
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