A new International Finance Corporation (IFC) study shows that its long-term investments in infrastructure projects in emerging markets have outperformed the S&P 500. The findings suggest that investors may be overstating the risks in these jurisdictions, with the IFC saying the perceived risk-return profile is “more pessimistic than warranted”. The research adds impetus to calls for banks to be freed from the regulatory burdens that they argue are limiting their investments in infrastructure projects in Africa.
The continent, which has some of the world’s fastest-growing economies, is grappling with a debilitating $85bn annual infrastructure financing gap, limiting growth and opportunity. The research note by the IFC, the investment arm of the World Bank and the largest global development institution focused on the private sector in developing countries, found infrastructure financing in emerging markets presents a compelling investment case. “Uninformed views on the risk-return profile of investing in developing economies may be more pessimistic than warranted by the actual track record of emerging market investments.
Better information and transparency can thus help,” the research note said. “If data analysis reveals that actual returns exceed uninformed perceptions about risky emerging market investments, foreign investors may become more favourably inclined towards investing in these markets. “Making private equity investments in emerging market infrastructure alongside IFC, a global investor would have achieved, on average over the long run, a better return than holding the S&P 500 and a better return than the MSCI EM index.” The study was conducted by economists and finance experts Anusha Chari, a professor at the University of North Carolina; Peter Blair Henry, a senior fellow at Stanford’s Freeman Spogli Institute; and Paolo Mauro, a director of the economic and market research department at the IFC.
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Making private equity investments in emerging market infrastructure alongside IFC, a global investor would have achieved, on average over the long run, a better return than holding the S&P 500 and a better return than the MSCI EM index. It looked into the performance of equity stakes in emerging market infrastructure ventures backed by the IFC over the past six decades, comparing these investments with portfolios of publicly listed equities. This was done, according to the IFC, by using a public market equivalent calculation which considered all money invested in the private fund (contributions) and all money received back (distributions).
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