The Beijing-based Asian Infrastructure Investment Bank is establishing a $500m fund that will hold a diversified portfolio of bonds from corporate issuers in the emerging and frontier markets of Asia to finance infrastructure investments.
The fund “aims to promote infrastructure as an asset class, develop debt capital markets for infrastructure and promote the integration of environmental, social and governance principles in fixed income investments” in the region, the AIIB said.
Ultimately, the plan is to support other investors to participate in the initiative or set up similar platforms, the AIIB said. Many investors are leery of investing in infrastructure given the political risks that often accompany such projects outside of developed markets, especially when there are no sovereign guarantees involved.
The fund plans to purchase the debt of up to 50 corporate issuers, whether private sector or state-owned and promises investors a yield of several hundred basis points above the current level of US Treasuries, said the AIIB’s Dong-Ik Lee, who is in charge of executing on the project. All the debt is dollar denominated, as is the AIIB’s lending in general.
“We plan to hold these securities to maturity to avoid interest rate volatility,” Mr Lee said. Noting that credit rating agency practice makes it impossible to rate companies more highly than their sovereigns, he added that “there is a lot of hidden value” to be uncovered.
The fund will invest in the bonds of Chinese issuers although it plans to impose some country limit on the mainland, which is by far the biggest issuer in Asia.
In launching the scheme, the AIIB hopes to become a catalyst for the more rapid adoption of environmental, social and governance (ESG) principles in Asia, which has lagged other parts of the world. It also plans to work with as yet unnamed asset managers to produce research on ESG investing.
The move follows on similar efforts from institutions such as the International Finance Corporation arm of the World Bank to attract investment for infrastructure by providing cautious institutional investors such as insurers, pension funds and sovereign wealth funds with platforms that offer them a diverse pool of fixed income securities backing greenfield projects to reduce the risks entailed.
The AIIB - conceived by China as a less bureaucratic alternative to the Asian Development Bank - began operating as a regional multilateral development bank two years ago.