June 7, 2016
Interviewed by: David Snow
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IFC AMC’s Take on Emerging Markets and Infrastructure

Gavin Wilson of the IFC Asset Management Company discusses current opportunities and challenges in the emerging markets, and why the infrastructure play is particularly compelling.

Gavin Wilson of the IFC Asset Management Company discusses current opportunities and challenges in the emerging markets, and why the infrastructure play is particularly compelling.

IFC Asset Management Company’s Take on Emerging Markets and Infrastructure
With Gavin Wilson of IFC Asset Management Company

David Snow, Privcap: Today, we’re joined by Gavin Wilson of IFC Asset Management. Gavin, welcome to Privcap. Thanks for being here.

Gavin Wilson, IFC Asset Management Company: Thank you for having me.

Snow: Since its founding in 2009, and with you at the helm, what have you learned about the right way to do this? How have you refined the IFC Asset Management approach?

Wilson: The strategy has been slowly but surely. I mean, we’re lucky to have had a pretty successful track record in terms of creating new funds and raising them. We now have, I think, cumulatively raised about $8.7 billion. That includes about $2 billion or so of IFC money, so it’s about $6 billion and a bit of external money. That’s across 11 different funds. What we’ve tried to do is have each fund be reasonably focused, but broad enough to have a diversified portfolio. So, our core direct equity funds are either regional or sectoral. On the sectoral side, we have infrastructure and the financial sector, two of IFC biggest sectors in terms of it’s own investing.

Snow: So as you know, many emerging economies around the world have taken an economic hit, which has caused a lot of international capital to withdraw from emerging markets or at least to be more hesitant. What does it look like now within your portfolio? What is the real impact of this economic downturn and how worried should investors be?

Wilson: I think we need to distinguish between a foreign-exchange hit and a slowing-growth scenario. First of all, growth expectations across the globe are lower now than they were a few months or a year or two ago. That affects both the emerging world as well as the developed world. Financial returns are not directly correlated to economic growth, but obviously you would prefer to have a higher growth scenario. This is something that varies country by country.

What I would say is that I think the macro environment is a bit more important now than it was a few years ago, because the macro story in different countries is more variegated than it used to be. One obvious example of that is commodity exporters versus commodity importers being hit in very different ways by the reduction in oil prices. That’s on the economic macro side. At the company level, some of our companies are doing extremely well, despite the bigger-picture growth story.

On the foreign exchange side, we, like many investors, denominate our funds in dollars. But they’re not U.S.-dollar funds. In other words, when global asset managers are allocating to the funds we manage, they’re not saying, “That’s a U.S.-dollar allocation.” If anything, they’re actually saying, “That’s an emerging market non-U.S. dollar allocation.” Of course it looks bad when the dollar rises very quickly; therefore, any fund that’s denominated in dollars, which is investing in other currencies, gets hit. But investors are savvy enough to see the real return versus the dollar return and also to compare against benchmarks. At some future time, the dollar will snap back. We’ve even seen that in the last few weeks as what’s happening with the dollar trajectory.

Snow: What makes you most bullish or most excited about being an investor in the emerging markets as you look around the world? Whether it’s a demographic set of facts or a cyclical understanding, what makes you excited to be in the position you’re in?

Wilson: The long-term fundamentals are terrific. Demographic, dividend, urbanization, increased trade, open markets, better regulation—all these things are very attractive if you’re a long-term, patient capital investor. But I think what’s particularly exciting is the fact that the perception and the reality of risk are different. By that, I mean the real risk is lower than people perceive it to be. So, if you are able to understand that risk, you can take advantage of it and make a lot of money while having a huge impact, precisely because the world perceives the risk to be higher than it really is.

Snow: The emerging markets have a huge challenge and an opportunity in the form of infrastructure. Your firm invests in infrastructure assets—what are some really interesting plays and opportunities you see from your vantage point?

Wilson: In developed markets, infrastructure is typically low risk and low return. In many cases, [it’s] existing assets and a question of operating them with government-backed contracts and reasonably low returns, but very low risk.

Now, in emerging markets, a lot of the infrastructure investments are really in private equities, just they happen to be in sectors we traditionally we call “infrastructure.” They could be greenfield [projects], where there’s real construction risk and you’re creating primary demand for those infrastructure services, whether it be ports, roads, airports, bridges or whatever it might be. That’s primary demand that’s being created and there’s real construction risk. But the opportunity to earn private equity-style returns, whether or not you refinance once you’ve gotten past the construction phase, which I think we’re going to increasingly see as pension funds come into more brownfield assets in emerging markets, which traditionally they haven’t done.

In addition, even with brownfield assets, there are operating companies that are themselves great growth stories. Because they are gradually working and growing into a market which traditionally has been served by public utilities and municipalities and where some of these regulatory regimes in emerging markets are much more modern and investor-friendly than the equivalent regimes in developed markets.

Take water in Brazil, for instance. It’s a much more investor-friendly regulatory regime than, for instance, in the U.S., where there are very few private water utilities, to my knowledge. But, in Brazil, there’s opportunity for good private operators to grow by getting more concessions from states and municipalities. These are existing assets, but you can still build a growth story around it through a good operating company that’s able to provide more efficient and better services for the people of those countries.

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