China’s New Infrastructure Bank Could Be Boon for Private Equity Firms

TAIPEI, Taiwan (TheStreet) -- A new $50 billion infrastructure bank being set up by the Chinese government will likely be a boon for private equity firms as well as major Chinese state-owned infrastructure builders and operators.

The Asian Infrastructure Investment Bank, expected to be operational by year's end and headquartered in Beijing, will pool funds from 31 prospective founding member countries. In total, these members have pledged around $50 billion to the bank. 

Projects aided by Beijing's development bank would cover energy, transportation, telecommunications and water supplies, to name just some of the categories, in a 4.3 billion-person region anchored by China. Much of Asia is developing rapidly: An estimated $8 trillion will be spent on infrastructure projects between 2010 and 2020, the Asian Development Bank Institute estimates.

"It's not a pie that's shrinking," said Song Seng Wun, an independent Southeast Asia economist based in Singapore. "It's growing very, very fast. Funding appears to be there. There is no shortage of opportunities."

Chinese officials have not specified exactly how projects led by the infrastructure bank, which was first proposed in 2013, will be funded. The United States regards China's creation as a rival to the similarly funded World Bank and International Monetary Fund, but with laxer standards.

But studies of other development banks with projects in Asia indicate that private equity has been a key funding source, and analysts in China indicate the new one would be no different as a way to spread risk and stoke interest in projects that might be slow to pay returns.

The 67-member, Manila-based Asian Development Bank, for example, approved a health care private equity deal in May, committing $60 million to a fund run by New York-based OrbiMed Asia Partners for medical businesses in China and India.

China's bank will work the same way, financial analysts predict. It might tap private equity partners to invest in toll roads in return for some of the tolls, or in power plants for a piece of the revenues earned from ratepayers, for example. Gains might accumulate slowly or modestly for the private equity partner, but the involvement of the development bank would cut their risk to near zero by guaranteeing a minimum return, co-investing or financing any debt.

"It seems like everyone's eager to be taking part, but we expect Chinese, Indian and Singaporean PE firms will be taking particular interest, China and Singapore benefiting greatly from stronger trading partners nearby and having reserves to spare, India interested in strengthening its own faltering infrastructure," said Matthieu David-Experton, founder of market research firm Daxue Consulting in Beijing and Shanghai.

As a testament to what can be made from Asian infrastructure projects, Armstrong Asset Management of Singapore closed a Southeast Asian energy fund for $164 million in 2013, exceeding a target of $150 million, due to what it described as "robust" interest from investors in Asia, Europe and North America.

A leading private-equity contender for projects led by the new bank would be Kohlberg Kravis Roberts   (KKR), since the New York-based firm, which has total investment assets of about $100 billion, has a track record of projects in Asia. In 2013, KKR said it would invest $140 million in two high-end Chinese dairy farms, and last year, it advised an environmentally friendly Indonesian cashew processing facility on how to raise its first $900,000, which led to another $1.5 million in investment.

BlackRock Private Equity (BLK) and the Carlyle Group (CG) would be other big-name contenders likely to fund projects. Washington, D.C.-based Carlyle, which has $194 billion in assets under management, said in September it had closed a $3.9 billion Asia fund, its fourth targeting the region. The private-equity side ofNew York-based BlackRock, with total assets under management of $4.59 trillion as of June, led a $300 million funding round for South Korean online retailer Coupang last year.

No one from the media offices of BlackRock, Carlyle Group or KKR would comment on the prospect of working with the infrastructure development bank.

Other likely beneficiaries from Asian infrastructure projects  include China's state-owned infrastructure builders and operators, the likes of U.S.-listed railway service provider Guangshen Railway Company  (GSH) or metal producer Aluminum Corporation of China, (ACH) also traded on the NYSE.

As China's economic growth slows, those companies would be keener on projects outside of China, said Jack Perkowski, managing partner of merchant bank JFP Holdings in Beijing.

"Over the past 30 years, many SOEs [state-owned enterprises] have gained a great deal of experience building road, rail and power infrastructure projects in China, and are now interested in exporting this know-how and expertise," Perkowski said.

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.

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