Emerging Markets Infrastructure Debt
October 11, 2022
In this episode of Engaging Alternatives Spotlight, Elana Margulies-Snyderman, Director, Publications, EisnerAmper, speaks with Susan Wisialko, Founder and CIO of Global Infrastructure Finance, a Boston-based asset manager that invests in emerging markets infrastructure debt. She shares with us her outlook for investing in emerging markets infrastructure debt, including the greatest opportunities and challenges, how the firm is integrating ESG, DEI and more.
So Susan, to start off our conversation today, could you tell us a little about your firm and how you got to where you are today?
SW:Certainly. I founded the firm to give institutional investors access to a niche fixed-income strategy, focused on investing in infrastructure across emerging markets globally. Today, if you're an institutional investor and you want access to the strong returns of infrastructure debt, you're pretty much relegated to private assets in developed markets. The problem is that there was $336 billion of dry powder, according to Preqin, as of May of 2022, which means that this was all money that investors had committed, but that managers were still looking for projects to deploy. This suggests that infrastructure, private asset infrastructure debt returns will disappoint. We look in a different geography altogether, global emerging markets, and we use a different investment instrument. We buy listed securities with a daily market price that support the development of infrastructure across emerging markets globally.
The result of this is less concentrated portfolios, more liquid investments. Where unlike some private developed market infrastructure debt, you have to put your money away for 10 years, with us, you could take it back in six months if you really need to. There's no FX risk, all of our investments are in dollars or swapped to dollars. No J curve, so you can almost immediately start earning the strong infrastructure debt returns. And lastly, but by no means leastly, we try to do well by doing good. What I mean is it's our favorite sustainable investment strategy. We help countries grow their GDP by investing in infrastructure projects that don't impede the ability of future generations to do the same. It's a pragmatic approach to sustainability.
EMS:Susan, I'm excited to take a deeper dive into your strategy, so I'd like to hear your overall outlook for the space.
SW:Well, the outlook is quite robust, and I'll give you three reasons why. So first, it's not a capacity constrained strategy. In 2021, there were $470 billion of bonds issued globally to support infrastructure development in the whole world. Of that, $124 billion was in emerging markets, and that's up from $98 billion that was created in emerging markets in 2020. The second reason is that growth is slowing globally. With rising US interest rates and central banks around the world increasing interest rates in their fight against inflation, GDP will suffer. The advantage is that S&P did a study that shows for every investment in infrastructure a country makes, it gets back an incremental leverage return on additional GDP growth over the next three years. So infrastructure investing is a great way to help grow GDP.
And EM, emerging markets are to be the growth drivers globally for GDP growth over developed markets due to population demographics as well as economic development status. And the third reason the outlook is robust, not only because there's enough volume issued and there will be a need for the financing, but third, there's regulatory tailwinds to the strategy. And what I mean by that is historically banks have financed these assets, but in the wake of the global financial crisis in 2007, 2008, from a regulatory capital perspective, it's become way more expensive for banks to fund these assets. So as a result, there's a natural entree for non-bank providers of long-term debt, which is what the fund does.
EMS:Susan, I wanted you to share some specific opportunities you see in your investment strategy.SW:Sure. Well, generally, we see significant opportunity to help with the global energy transition, from carbon sources of fuel for electricity generation to non-carbon sources. And this is exactly what's happening today in Chile. We have several coal and gas-fired electricity generation providers that are switching to solar and wind and hydropower, and we're happy to help them with that transition. More broadly, electricity in general is our largest segment exposure. There are many countries in emerging markets like Indonesia, for example, where today only 97% of the population has access to electricity on a dedicated basis, and we're happy to help them meet the government's goal of 100% of the population with access to electricity.
EMS:Susan, on the other hand, I'd like to hear about some of the challenges you face through your investment strategy and why.
SW:Well, emerging market debt is generally an underinvested asset class. A focus on emerging market infrastructure debt is only offered by very few firms. Active management is critical because oftentimes there are serious credit dislocations that occur in the market that are brought on by factors that have nothing to do with the issuer's ability to repay debt. These could be technical factors, it could be sentiment. The idea is that good fundamental credit analysts can capitalize on these opportunities. Remember, our returns come from both coupon income as well as spread compression, which results in price appreciation. So there's a mark to market volatility in our strategy, which doesn't exist with private asset developed market infrastructure debt. Also, it's not really an appropriate asset class for an index because indexes totally ignore ESG.
EMS:Susan, I wanted to shift gears a little bit and touch on ESG, which is top of mind for the investment industry. So I wanted to hear your thoughts on how your firm is addressing this.
SW:Well, ESG and emerging markets go hand in hand. If you're investing in emerging markets and you're not following ESG principles, especially governance, you're not going to be investing in emerging markets very long. We've always had what we call an ESG aware process. So we always believe that unless we had a quantifiable, fully auditable by independent third party process, we would never claim that we have an ESG strategy. But as an ESG aware strategy is how we position it because we follow all the precepts and all the concepts, it's just a more qualitative process. It's harder for fixed income than it is for equities to deal with ESG issues. And it's even harder still for emerging market fixed income because there's no real third-party providers like MSCI or Sustainalytics. Very few of them are rating any of the issuers whose bonds we buy.
EMS:And Susan, I also would like to touch on DEI today. And clearly as a woman-owned firm, you already embrace DEI, but I'd love to hear further thoughts of what else you're doing to embrace it.
SW:We are employee-owned, female-founded and led. I've repeatedly told my staff that what I strive for is to create an environment that I had at my favorite job. At my favorite job, on Sunday night, I couldn't wait for Monday morning to come because I was so excited to get into the office because I was going to be learning so much and having such a good time. And I told all of them that's what I strive for them to have every week.
EMS:Very inspiring, Susan. We covered a lot of ground today, so I wanted to see if you have any final thoughts you'd like to share with us.
SW:Well, we're an emerging manager in an emerging asset class in emerging markets. We are excited by the opportunities that lie ahead. We're fortunate because we believe we can do very well for our investors, and at the same time, help improve the quality of a lot of people's lives in emerging markets by financing the delivery of critical services. It's not sexy, but if we could finance a sewage treatment facility in a capital city where today the sewage is dumped in the river that runs through the city, the improvement in quality of life of the inhabitants there is almost infinite.
EMS:Susan, I wanted to thank you for sharing your perspective with our listeners today. And thank you for listening to the EisnerAmper Podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper Podcast when we get down to business.
Transcribed by Rev.com