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Investors raise EM infrastructure exposure seeking better returns

By Claire Milhench

LONDON (Reuters) - Institutional investors are raising their exposure to emerging markets infrastructure in pursuit of better returns, an annual survey showed on Monday, as fierce competition has driven up prices in developed markets.

The global study, conducted by Stirling Infrastructure Partners, an adviser to institutional investors, polled 44 sovereign wealth funds (SWFs) and pension funds with some $63 billion allocated to infrastructure, and found a growing appetite for assets in riskier markets.

Some 41 percent of respondents said they were invested in or interested in Asia-Pacific, up from 28 percent in 2016. Central and Eastern Europe rose to 30 percent from 22 percent and Latin America to 27 percent from 11 percent.

Investing in toll roads, airports, power and ports is attractive to SWFs and pension funds because they deliver steady, predictable cashflows and so are a good match for their long-term liabilities.

But demand for such assets in developed markets has been so strong and supply so tight that investors have bid up prices, crimping returns.

Michael Stirling, chief executive at Stirling Infrastructure Partners, said better margins could be achieved in emerging markets as there was less competition, but currency risk and concerns around the rule of law had held some investors back.

However, the more sophisticated investors understood how to manage those risks. "As investors become more confident and competent, they are more willing to look at those markets," Stirling said.

Africa was out of favor, with only 5 percent of respondents saying they were invested in or interested in it, down from 11 percent in 2016. African SWFs have offered co-investment opportunities and guarantees to allay fears around political risk and payment, but it remains a niche market.

The study, carried out between November 2016 and January 2017, found developed markets still accounted for the bulk of infrastructure investments. Some 89 percent of respondents were invested in or interested in Western Europe and 75 percent in North America.

The latter number was down from 81 percent in 2016, but Stirling said this was not statistically significant as the survey sample had changed slightly. U.S. President Donald Trump has floated plans to spend up to $1 trillion on infrastructure projects but few details have emerged.

One potential risk is a change to U.S. policies supporting "green" infrastructure for clean power. Developers worry that without certain types of tariff to support renewable energy, it will be difficult to expand as quickly as they would like.

Renewables infrastructure remains the most favored sector for investors, with 89 percent saying they were invested or interested in this, up from 70 percent in 2016.

"The technology risk is better understood, there are more sources of finance today, and it offers stable income streams provided there are offtakes in place," Stirling said, referring to agreements between power generators and distributors covering the sale of the electricity.

Airports attracted 77 percent of respondents, up from 65 percent in 2016, and toll roads 73 percent, up from 59 percent.

Investor appetite remains robust - 70 percent of respondents said they had "definite plans" to invest in infrastructure, leaping from 9 percent last year.

A third of respondents said they expected to commit over 200 million euros over the next 18 months, and 41 percent said they would be comfortable with a holding period of more than 15 years. "There's a shift toward larger-sized investments for longer-term allocations," said Stirling.

In terms of accessing the market, half were using a combination of direct investments and external managers, but there was also a rise in the number going direct, to 30 percent from 14 percent.

(Reporting by Claire Milhench; Editing by Toby Chopra)