Best Performance Bet in Asia: Mining, Infrastructure & Private Equity

"Study the past if you would define the future."

Confucius, Chinese reformer & philosopher (551-479 BC)

With global hedge fund performance looking at sub-3% returns through the first six months of 2010, a critical decision facing institutional investors may well be to ramp up private equity and infrastructure investing.

While the juiciest deals may be full there remain a healthy and growing supply of mid-tier opportunities. Top tier firms are oversubscribed in today's environment after a period of lackluster involvement by western investors. Blackstone, Carlyle and Bain are all in capital raising mode looking at Chinese yuan-denominated deal. For example, in the three years from 2005 PE fund raising rose from $2.1 billion to $12.2 billion.

Meanwhile, retail investors are parking their money in FX (the Yuan is a one way bet to appreciate) and high yield fixed income - which typically means the Asian bond markets where they can get relative certainty of return in well run companies.

That said, regardless of the state of the secondary markets in the region, straining infrastructure investments needed by rapidly urbanizing countries such as India and China may prove to be the better way to maximize investment NPV and IRR levels over the 30% territory.

Aside from toll roads, bridge-building and car parks there is the distribution and trade infrastructure such as port and storage facilities that will need to be funded, built and upgraded in order to provide the growing middle class population with imported foods, consumer and capital goods. These are simple macro issues that will need to be resolved. And while the investor's money may be held up in more illiquidity the payoffs are likely to be more consistent and predictable, features that make them very attractive for the region's institutional investors, SWFs and western firms too.

As part of this trend, commodities and especially the mining sector is one of the hottest places to be. According to data compiled by Bloomberg, commodity companies have announced US$362 billion of takeovers. Resource deals account for 28% of this year's US$1.26 trillion M&A market. This is twice their average share over the last 10 years.

So clearly, money flows will not be heading to Japan, as they did in the 1970s and 1980s. In fact, Japanese institutional investors (in particular, the public pension funds) should be entering a period of significant capital deployment throughout Asia, with an emphasis on scalable, high yielding project growth such as nuclear reactors, power stations and mining deals.

An ETF that invests in Asian infrastructure deals and or private equity projects might be sure-sellers to retail. Good luck to those firms that are shrewd and quick-witted enough to get that branded product to market first! Mahalo.