Analysis

32 Infrastructure Investor • March 2021

As the fi rm continues to make inroads in the region, its infrastructure executive team tell Daniel Kemp what opportunities they see in four target markets and how APAC’s tailwinds will support the strategy

KKR goes big in Asia-Pacifi c

KKR closed its inaugural Asia-Pacifi c-focused in-frastructure fund on its hard-cap of $3.9 billion in January. It was quite a statement, representing

what is believed to be the biggest raise for a pan-regional infrastructure fund in Asia-Pacifi c.

This was despite the fact that it had only launched 18 months before and much of the process had taken place during the pandemic. It also represent-ed the end of the fi rst stage of KKR’s

push into Asia-Pacifi c infrastructure, a strategy it launched in January 2019 with the hiring of David Luboff from Macquarie Infrastructure and Real As-sets.

Luboff ’s remit was to build a team and raise the new fund. The challenge now is to deploy the large amount of capital raised, a task that is well under-way.

Infrastructure Investor spoke exclu-sively to KKR’s team across the region, including Luboff , to fi nd out how the strategy is shaping up.

Luboff was previously a senior man-aging director at MIRA, where he was involved in raising and deploying cap-ital for the $3.3 billion Macquarie Asia Infrastructure Fund 2.

“I was really attracted to KKR’s ex-isting presence in the region, with close to 200 people,” he says, when asked what convinced him to jump ship. “It seemed like a great opportunity to pull together an infrastructure team that could leverage KKR’s existing platform and grow this new business in an excit-ing market.

Analysis

March 2021 • Infrastructure Investor 33

“India is a complex market and you have to make sure you’ve thought through all the angles”

HARDIK SHAHKKR

“In our fi rst year and a half of investing we’ve done six deals … without going through traditional auctions”

DAVID LUBOFFKKR

“I’ve worked with some of the oth-er executives on the team before. And other team members have exceptional and diverse experiences, so I thought that if we could put all that thinking together it could be a very powerful combination. We are grateful for the LPs’ response and KKR’s culture has proven to be stronger than I could have hoped for.”

As for the wider opportunity set in the region, Luboff is bullish, having had extensive experience doing deals throughout Asia-Pacifi c in his previous role. “We’ve seen the Asian infrastruc-ture market become more institutional and we’re seeing bigger transactions in the region involving blue-chip infra-structure investors,” he says.

The focus for the fund, KKR Asia-Pacifi c Infrastructure Investors, will be on brownfi eld assets in a select few markets: mainly India, Japan, the Philippines and South Korea, with an opportunistic approach taken to Aus-tralia, New Zealand and other coun-tries.

Luboff says China also represents a “very interesting” opportunity that the fi rm will examine closely, but the emphasis is expected to remain on the other key markets. It will not do deals in what Luboff calls “frontier markets” where KKR does not already have a presence, given that local knowledge and personnel on the ground are an important part of the fi rm’s strategy.

“In our fi rst year and a half of in-vesting we’ve done six deals, deploy-ing about a third of the fund, and all of those deals have been done without going through traditional auctions,” he says, demonstrating the strengths of lo-cal relationships. He adds that auctions are not off the table, with KKR having considered a few so far, though they will be “de-emphasised”.

Complex Indian marketThe six investments that KKR has made in Asian infrastructure so far are

“It was a chance to get in at ground level and build something up from scratch.”

The majority of fund capital is ex-pected to be deployed in the four key markets. However, KKR will retain the nimbleness to dynamically allocate capital to the best opportunities across the region.

In India, KKR has already done two sizeable deals.

The fi rst was a co-investment in May 2019 alongside Singapore’s GIC into IndiGrid, an operator of 11 elec-tricity transmission assets. KKR in-vested 10.8 billion rupees ($148 mil-lion; €122 million) and GIC invested 9.8 billion rupees to acquire 42 percent of IndiGrid’s outstanding shares.

In April 2020, it acquired fi ve op-erational solar energy assets from Shapoorji Pallonji Infrastructure Cap-ital (SP Infra), a Mumbai-based infra-structure developer, for 15.5 billion ru-pees. A few months later, it transferred those assets to Virescent Infrastructure, a renewable energy platform KKR launched in October.

“There are a lot of assets in In-dia with increasing competition for them, but you can still make attractive risk-adjusted returns,” Shah says. “We are focusing on assets with high-quality counterparties that are already opera-tional.

“Development risk in India, in most sectors, is often something to contend with, with perhaps the exception of re-newables.”

KKR’s thesis, which applies across the region more widely, is to purchase these high-quality operating assets, get a decent yield from them for fi ve to 10 years, and then sell them into an infrastructure market that will be more competitive than it is today, thereby se-curing a higher price and a return on the investment.

The assets in India are illustrative of this approach. “India is a complex mar-ket and you have to make sure you’ve

split evenly across India, the Philip-pines and South Korea. The nature of the deals and the sectors targeted are unique to the circumstances in each country.

Hardik Shah joined KKR in late 2018 as a managing director with re-sponsibility for the fi rm’s infrastructure investments in India. He worked at Macquarie with Luboff before leading Brookfi eld Asset Management’s own initial forays into Indian infrastructure.

“KKR was doing very well in global infrastructure and Asian private equity – so the next logical step was to build out our strategies in the region, like infrastructure, real estate and credit,” he says. “The fi rm’s deep resource base in India showed me it was serious and David gave the infrastructure strategy a lot of credibility.

Analysis

34 Infrastructure Investor • March 2021

“There are great tailwinds in the Asia-Pacific region – but they will only be accessible to us if we can demonstrate that track record”

DAVID LUBOFFKKR

thought through all the angles,” Shah says. “Both of the deals we’ve done here so far are platform investments, so we will continue to invest in them and build them further. They’ve gone very well so far.

“I imagine we will do more transac-tions here, just as we are pursuing op-portunities across the region.”

Philippines maturingOverseeing investments in the Philip-pines is Michael de Guzman, who also worked at Macquarie prior to his most recent role as head of Philippines for Credit Suisse.

“We’ve highlighted the Philippines as one of the priority geographies for the fund because we’ve already had previous successful investment expe-rience here,” he says. “The regulatory regime and the contracts that the Phil-ippine parties are used to, like pow-er-purchase agreements or transpor-tation concession agreements, come close to what we see in Australia, the UK or Singapore.

“Over the years we’ve seen an evo-lution where they’ve been refined to a state where we think they are investa-ble for foreigners and there are enough protections in place. They’re not per-fect, but those contracts are approach-ing what you’d expect in developed markets.”

The firm’s first investment, in July 2020, was the acquisition of an 11.9 percent stake in First Gen for 9.6 billion Philippine pesos ($199.8 million; €164.9 million). De Guzman describes the listed power generator, which has a 3.5GW capac-ity portfolio, as a “big fish in a small pond”. The investment has all the hall-marks of core infrastructure: contract-ed physical assets with stable revenues, coupled with growth potential.

The second investment, made in November, saw KKR acquire Pinnacle, the parent company of Frontier Tower Associates Philippines, for an undis-closed sum.

The Philippines currently has fewer

than 20,000 towers and de Guzman says it will need to get to around 50,000 to meet the demands of a growing pop-ulation.

The government passed legislation last year to allow more private invest-ment in the sector.

“We will use [Pinnacle] as a plat-form” he says. “The company is in ad-vanced talks with the Philippines’ top telcos to build more towers. And it’s a first-mover situation, where we feel if we’re one of the first to invest in this sector we can secure contracts.”

Further Philippine investments are likely to build on the telecommunica-tions theme, and de Guzman says the firm is on the look-out for renewable energy opportunities too.

Korea’s ‘chapter three’The third market in which KKR has made its presence felt is South Korea.

Here, Keith Kim oversees invest-ments. He is another former Mac-quarie executive who worked with Luboff on Asian investments.

KKR’s two deals in the country are in the waste management sector, a de-parture from the more traditional in-frastructure assets that have been add-ed to the portfolio.

Analysis

March 2021 • Infrastructure Investor 35

It first bought ESG Co from An-chor Equity Partners. The company provides industrial and medical waste treatment services. It swiftly followed that in October 2020 with the purchase of a 38 percent stake in TSK Corpo-ration, thereby becoming the sec-ond-largest shareholder in the landfill and water treatment company.

Kim says he had invested in the waste management sector for many years be-fore joining KKR, and was therefore familiar with the businesses involved. “These businesses are becoming larger and more complex, so the cost profile is becoming institutionalised to drive social value,” he says. “For what used to be small assets, ‘Mom and Pop’ op-erations, it’s not uncommon to see bil-lion-dollar transactions now.

“We anticipate that companies will begin consolidating very soon, and we believe that will lead to three or four significant players in the Korean mar-ket within the next three to five years.”

Kim says KKR essentially sought out what it felt were the market leaders in incineration and landfill and that the firm has aimed to create synergies be-tween the two businesses.

He says that deals like this are in-dicative of “chapter three” of Korea’s

infrastructure story. The first chapter, as Kim sees it, involved the develop-ment and sale of large, more tradition-al-looking infrastructure assets by the government, often in partnership with the private sector. These assets includ-ed toll roads, ports and other transport assets.

With those now largely built and often in the hands of local investors, competition is heavy, asset manage-ment has become passive and returns have become compressed.

The second chapter saw infrastruc-ture buyouts come to the fore, with institutions showing willingness to take controlling stakes in other types of in-frastructure businesses.

Now chapter three has seen these deals grow to another level of size and complexity, Kim says.

“These are chunky infrastructure assets, often involving chaebols,” he says, referring to the large industrial con-glomerates that play a significant role in Korea’s economy.

“Infrastructure deals are expected to get more and more complex, and hav-ing a local presence and understanding of how these structures and relation-ships work has been key to identifying the opportunities.”

APAC opportunityKKR has been busy already, then, de-ploying capital in three quite distinct markets.

The firm has an office in Tokyo with infrastructure professionals in place and is eyeing potential transactions in Japan. It also has infrastructure pro-fessionals in Australia and the Greater China area.

“Japan offers tremendous po-tential,” Luboff says. “It’s such a

relationship-driven market and KKR has such a strong position there and we are really excited to leverage off this presence with our Japan infrastructure team members.”

Other markets, like Australia and China, will be approached on a more opportunistic basis – Australia because of the high price of assets and the level of competition, China because of the challenges posed by local levels of li-quidity.

The experience of the past 12 months during the pandemic has not put a dent in the firm’s plans nor its strategy. It did not hamper fundraising, Luboff says, a statement easily backed up by the $3.9 billion KKR raised for the vehicle.

“We have not seen the dislocation in pricing that many thought we would at the immediate onset of the crisis,” he says.

“We made most of our acquisitions to date in that early covid-19 period, so our nimbleness was an advantage and we managed to invest well at that time.

“But generally, asset pricing has not been adversely impacted, which I think demonstrates the resilience of infrastructure and its relative attrac-tiveness.”

For Luboff, the most important goal so far has been to make sure KKR builds up a strong early track record in what is a new market for the firm.

“We feel we have a privileged posi-tion because of KKR’s presence in the region and the momentum in infra-structure that we have now, but to aug-ment that we have to deliver,” he says. “Our immediate focus is to deploy the remaining two-thirds of the fund as well as we can.

“With that backdrop, we’ll be well-placed for future growth, particularly because we’re in a growing market and there are more opportunities coming up.

“There are great tailwinds in the Asia-Pacific region – but they will only be accessible to us if we can demon-strate that track record.” n

Four to the fore: (clockwise from far left) KKR is concentrating its efforts in Asia-Pacific in the core markets of India, Japan, the Philippines and South Korea, while Australia and China will be targeted on a more opportunistic basis