The infrastructure market is at the top of its game in 2008. UK research house Private Equity Intelligence (Preqin) has published a report which reveals that the infrastructure market has grown almost ten-fold in the past four years. This unparalleled success comes in the wake of a surge of infrastructure disasters like Hurricane Katrina and the collapse of the Minneapolis Bridge that have left cash-strapped governments seeking out private investment.
Although, the credit crunch has affected much, the latest infrastructure report revealed that unlike the waning real-estate market, infrastructure is continuing to grow at breakneck pace with US$13.2bn already raised in 2008.
“The cash flow profile of infrastructure investments has been very attractive. Having some sort of inflationary link and being seen as a defensive, monopolistic asset has made it attractive to pension funds,” says Phil Page of investment consultancy Cardano.
Paul Lund, a project finance analyst at ratings agency Standard and Poor’s, agrees and explains that the infrastructure market is soaring because of its ability to provide long term returns. “We have seen values of transactions rise from US$100bn to US$350bn from 2003 to 2006,” says Lund.
A recent report by the American Association of State Highway and Transportation Officials supports Page’s claim and reported that at least US$140bn is needed to make major repairs or upgrades to one of every four US bridges. Page believes that the inability of US local governments to balance their books is making more opportunity available to private investors. “We are seeing more and more road deals and we are going to see that continue,” he says.
Further evidence of the scale of the infrastructure market in the US can also be seen in recent months from two funds that closed in May that raised almost US$10bn. The larger of the two was Global Infrastructure Partners (GIP), a New York-based firm set-up by Credit Suisse and US conglomerate General Electric, which raised US$5.64bn for its first fund. The second fund raised was Morgan Stanley Infrastructure Partners, which closed on US$4bn, smashing its target of US$2.5bn.
Although there are many deals on the table, the infrastructure market is facing challenges. An issue that continues to rear its head for private investors is the adverse public reaction to private investment in the US. Page looks back to the UK experience in the 1990s and early 2000s with the Private Finance Initiative (PFI) and other types of Public Private Partnerships (PPPs) to predict the future for the US “There was a bit of a backlash but PFIs have weathered the storm and I fully expect similar reactions from the US. At the end of the day, people will pay money for things that work.”
Further East emerging markets like China and India are starting to feel the pinch of the credit crunch. “India’s stock market is beginning to be affected,” says Paul Woodburym a partner at private equity firm Henderson Global Investors. But India has grown significantly in recent years, which Woodbury explains is to do with their legal system being similar to that of the European system as well as have a more transparent financial system.
Emerging European economies have also been quick to catch onto the benefits of private investment in government municipals. New economies in the EU are now allowing private investment in to build the necessary infrastructure requirements to drive their economies. The A1 motorway that is currently under construction in Poland is a good example of the European attitude to private investment. Stephen Vineburg, chief executive of CVC Infrastructure, believes that due to an aging population and aging infrastructure, governments across Europe are looking for private investments that are linked to inflation and infrastructure provides that very option.
The sheer scale of success that Preqin has reported could be overestimated. Lund believes that infrastructure as an asset class encompasses much more than it use to. “The term infrastructure has widened. It used to mean roads, utilities, anything that added value to the economy, but now car parks can call themselves infrastructure.” Woodbury agrees and believes that Preqin’s report is accurate in that it states that there has been massive growth in the infrastructure market, but says that a lot of private equity investments could overlap as infrastructure investments.
To many, infrastructure can be seen as a separate asset class than private equity. In the UK, pension funds are creating separate allocations for infrastructure as opposed to private equity. The difference can be found, as Page explains, in the fact that infrastructure buyers are not necessarily looking for distressed buyers. “They are looking for stable assets that have high and increasing cash flows coming off the business. It does certainly warrant a separate category, although we do consider it to be a certain kind of private equity,” says Page.
As stock markets continue to flounder and the credit crunch tightens the debt availability, investors are looking more and more to the defensive nature of infrastructure. “Infrastructure will remain a small part of the private equity market. It has given investors a choice – lower return for a more stable investment,” concludes Page.