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2013: What can we expect?

We asked leading professionals in the infrastructure asset class for their thoughts on what next year has in store. Today’s opinions come from Vincent Levita (pictured), Mark Richards, Paul Malan and Alain Rauscher.

Vincent Levita, President, OFI InfraVia

Vincent Levita

We believe that the infrastructure asset class will continue to be of interests for institutional investors in 2013 as it has essentially delivered on its promise (yield, value stability, capital protection, inflation correlation) and it is particularly adapted to current markets (low interest rate, equity volatility, disappointing alternative asset class). 

In 2013, we expect more allocation to flow into infrastructure, with in particular (i) the growth of successful funds, (ii) the development by global investors of direct investment strategies in large cap transactions, and (iii) the burgeoning of an infrastructure debt capital market. 

We also believe that the level of sophistication of the LP community towards the asset class will result in a better definition of GP mandates, with probably a broader segmentation of the offer by size, regions, or type of assets. 

In terms of sectors, we are still bullish on transportation, in particular with local transit projects supporting the urbanisation of our economies and are following closely the emergence of the communications infrastructure sub-sector. On the flipside, we are of the view that the consolidation of the renewable energy market is going to be slow to materialise in 2013 because of the instability of the various regulatory regimes.

Mark Richards, Partner, Projects & Infrastructure Finance Team, Berwin Leighton Paisner

Mark Richards

I suspect 2013 is going to bring a number of themes – first, we will see a number of refinancings as infrastructure assets acquired before or just after the credit crisis are refinanced into bank/bond hybrid transactions and in some instances deleveraged significantly depending on asset/sector type; second, we will see more assets coming to market from corporates looking to divest non-core assets – utilities will increasingly need to do this to maintain their source of investment grade debt; third, public sector finances will put pressure on governments to divest assets through the privatisation process; and fourth, greenfield projects will be more prominent in emerging/development markets and we will continue to see capacity improvements or “bolt on” projects/deals in developed markets unless the infrastructure is literally falling apart!  

Finally, continued uncertainty in the financial markets will place a greater desire on investors to look towards “real assets” so migration from sovereign debt and/or publicly traded equities towards infrastructure within investors asset allocation pots (whether through direct investments, credit/debt funds or leveraged equity funds).  

In summary, all of these themes, when aggregated, mean, in my view, greater pipeline in 2013.  

Alain Rauscher, chief executive, Antin Infrastructure Partners

Alain Rauscher

In 2013 we anticipate ongoing strong deal flow in Europe, driven primarily by the corporate sector as infrastructure strategics continue to deleverage or recycle capital to invest in growth. We expect that government disposals will remain slow to realise, characterised by lengthy auction processes and a tendency for buyers to overbid for 'trophy assets'. We also expect increasing deal flow from infrastructure funds, with several mid-2000s vintage funds approaching the end of their fund lives, as well as other funds selling due to refinancing needs.
 
Infrastructure investors in 2013 will face an ongoing challenging macro-economic backdrop in Europe, with continuing pressure on countries’ balance sheets. We expect the possibility of negative surprises to remain, in the form of new taxes, changes to thin capitalisation rules and pressure on allowed returns on regulated assets and renewables. Theoretically, this should encourage investors to incorporate an appropriate risk buffer when pricing assets, however with many direct investors entering the market, we expect prices to remain generally buoyant, particularly for trophy assets.  
 
In such a context, entry price discipline is paramount. We believe that less visible, mid cap-size deals will provide better value for investors, as bilateral terms can be negotiated and transactions structured to mitigate downside risk.