Demand for emerging markets infrastructure is increasing and changing the nature of sovereign collaboration, according to the Invesco Global Sovereign Asset Management Study 2015.

The study, which interviewed 59 sovereign wealth funds, government pension funds and central banks worldwide, has identified strong demand for alternative and emerging market investments last year.

Nick Tolchard, Chair of Invesco’s Global Sovereign Group, said: “Many sovereigns had made recent policy decisions to increase strategic asset allocations to alternatives to optimise risk-adjusted returns and diversification benefits.”

“Furthermore emerging market target allocations increased, in recognition of attractive economic growth profiles,” he said.

The report findings highlight that sovereign portfolios were overweight to emerging market infrastructure (17%), compared to emerging markets generally (9%).

Tolchard said that in emerging markets, infrastructure helps sovereigns manage investment risk.

Sovereigns feel they have the competitive advantage over most other investors due to their long-term investment horizon, their ability to absorb large deal sizes via flexible financing structures and their ability to leverage their network to source deals.

However the report highlights that there are two further factors that make infrastructure investments particularly attractive in emerging markets.

First, within emerging markets infrastructure is seen as low risk compared to other asset classes: infrastructure reduces risks linked to politics and regulation as investments often have local governmental support.

Furthermore, many respondents explained that co-investment with other international organizations such as governments, development banks and sovereign investors (all regular infrastructure investors) adds credibility and helps to reduce perceived investment risk.

Despite strong underlying demand for emerging market infrastructure investment, some challenges remain for sovereigns.

Tolchard said that despite a strategic commitment to emerging markets, sovereigns highlight the investment risks, such as political instability, corruption, regulation change and a lack of legal protection, as limiting factors.

“These risks are of particular concern to sovereigns because they cannot be quantified and many emerging market investments are prohibited by risk management guidelines irrespective of potential returns,” he said.

“Data quality to manage and monitor investments was a concern, notably in the most politically unstable or corrupt regions. Deal size and frequency was a collective challenge for the larger sovereigns needing to deploy significant assets. Cost was a concern across a range of sovereigns, particularly when you pay an external party to source the deal but even the costs of an internal team were significant when translated into basis points,” he added.

Demand for infrastructure has acted as a catalyst for sovereign collaboration.

According to the report, the biggest challenge for sovereigns is sourcing deals (53% of sovereigns cited this as the number one factor).

Respondents explained that sourcing deals is hardest in infrastructure and that it was driving accelerated growth in collaboration between sovereign investors.

Every sovereign with an allocation of greater than 5% to infrastructure expected to increase collaborations in the future, according to Invesco’s report.

“Investment-focused collaboration is evolving quickly and certain sovereigns are developing infrastructure propositions specifically to target other sovereigns (as well as private sector investors),” said Tolchard.