5.3 For policy-makers
A benefit of the growth of interest by asset owners in investing directly in illiquid assets is that more capital is available for long-term investments in companies, infrastructure and real estate.
Increased opportunities to attract cross-border investments
Much of the long-term capital available for direct investments is from investors outside the potential country in which the investment would be made. The focus of this sub-section is on high-level recommendations to help policy-makers develop a framework conducive to attracting foreign capital flows while taking domestic concerns into account.43
Three recommendations are put forward: policy-makers should distinguish between ownership of an asset and control of it; they should develop an investment environment and capital market conducive to direct investing; and when assessing specific direct investments, they should focus on the economic substance of transactions.
• Distinguish between ownership and control: “Ownership” involves having cash flow claims as a result of owning an asset, while “control” means decision-making authority related to the asset.44 With a widely held public corporation, for instance, a management team typically has control while the majority of the shareholders (who are generally not also the business’s managers) have a claim to the cash flow generated by the operations of the business. In contrast, a wholly self-funded business owner who is also CEO of the business has both full ownership and control.
It is understandable that many assume ownership implies control. Much of the debate in academic circles about corporate governance, for instance, is on how to overcome the agency hurdles between the dispersed shareholders of large public companies and the business management team, implying that the role of ownership is to effectively exercise control. In another context, entrepreneurs looking to raise capital from venture investors are often concerned about the control rights they give up alongside an ownership stake.
Regardless, the interplay of ownership and control is not fixed. Different corporate structures, for instance, can allow key shareholders to maintain underlying control despite outside shareholders having disproportionate ownership stakes over cash flows. With an infrastructure asset, an investor investing, for example, in the cash flow of a toll road through an equity investment in a lease of the road would have cash flow rights proportionate to its ownership stake in the lease. The extent of the investor’s operational control would depend on the details of the agreement with the underlying government entity. Nonetheless, the government entity would still have ultimate control of the asset.
• Create an investment environment/capital market conducive to direct investing: Policy-makers will be more successful in attracting direct investments in companies, infrastructure and real estate to the extent that their broader investment environment is perceived to be attractive. Investment frameworks should be transparent, consistent and unbiased. Applicable rules and principles should be spelled out and applied consistently. Finally, regulatory and tax policies should not structurally disadvantage foreign investors relative to domestic ones. Related to this, the more liquid and diversified a country’s capital market, the more investors will be willing to consider investing in it. It will provide more information for valuing a transaction, options for financing it and confidence in the ability to exit the transaction if desired.
• Focus on the economic substance of transactions: An important challenge for policy-makers is how to take into account domestic national security concerns related to large foreign investors taking positions in national assets (e.g. infrastructure, utilities, media, other strategically important industries), while still being open to foreign capital flows. By focusing on the economic substance of transactions, policy-makers will be best positioned to distinguish when an investment is being made for other than commercial reasons.
Regarding sensitive assets, policy-makers can address the impact of potential non-financial factors on a case-by-case basis. Concern is often focused on foreign institutions controlling domestic assets and the implications of this control. To address this, many cross-border investors make a point of only taking minority ownership stakes in partnership with other investors to mitigate concerns about who controls the asset.45 However, even if an investor has majority ownership of an asset, it does not necessarily control it.
Increased supply of capital for infrastructure
Many governments have expressed an interest in attracting capital for the development and refurbishment of infrastructure. The World Economic Forum engaged in structured interviews with leading long-term investors in infrastructure to understand what makes one country or jurisdiction a more attractive investment environment to them than another. The consensus was that potential destinations will be compelling for investors when they have a clear strategic vision for attracting capital for infrastructure; have a supportive policy and regulatory environment; and pro-actively take the investor perspective into account early in the process of project prioritization and structuring.
While there is no template for which specific policies will work in various jurisdictions, to the extent that some governments adopt more of this general framework than others, those jurisdictions are likely to be more attractive as a destination for capital. A more detailed presentation of the central aspects of such a policy framework is presented in the Infrastructure Investment Policy Blueprint.46
Institutional investors can play an important role in providing long-term capital. Policy-makers and potential investees often find them especially attractive as a result. However, since many investments would be made by investors outside the country of destination, it can be challenging for capital to flow into potential investments without a policy framework conducive to attracting capital from across national borders.
Some important points that asset owners, asset managers and policy-makers should take into account have been highlighted here, given the increase in capital being invested directly. Assuming that they are large enough to invest directly, asset owners, above all, need to ensure that they formalize a governance structure robust enough to support their direct-investing ambitions. Asset managers should proactively refine their approach to adding value to asset owners, acknowledging that the investment landscape is evolving, but that they still have a central role to play. Finally, policy-makers should recognize the need for frameworks conducive to attracting long-term capital for investment in companies, infrastructure and real estate.