With leverage drying up and deal flow all but disappearing, it isn’t surprising that many alternative investment GPs have traded in their LBO hats for special situations, turnaround and distressed hats. For others, though, the refuge has come in the form of hard hats.
As global infrastructure fundraising continues at a record pace, its resilience seems counter-intuitive. After all, why should an asset class that has traditionally relied on piling heavy loads of debt on the back of razor-thin debt service coverage ratios enjoy only increasing popularity at a time when Libor flirts with 500 bps and credit spreads have widened for even the safest assets? (And that’s in the rosy scenario that one can actually secure any debt).
The infrastructure asset class is growing because, to be blunt, the size of the opportunity is almost unfathomable. Dominique Senequier, the head of France's AXA Private Equity, recently made waves when she estimated that the world will require $53 trillion of investment in infrastructure over the next 25 years. Just a few months ago the UK government’s Foresight programme estimated $32 trillion through 2030.
And while the estimates for the needed spend keep going up, the estimates for how much of it governments can pay for keep going down. The widening gap screams for private investors, yet private equity funds for infrastructure have only this year approached $100 billion for the first time. This is only the beginning.
Making the strategy all the more attractive, when leverage finally returns, GPs overwhelmingly expect infrastructure, particularly energy-related assets, to be the first ones to get financing. That’s thanks to the asset class’s characteristics that have been its selling point for decades: stable, long-term cash flows linked to necessary services with growing demand and significant barriers to entry.
The legislative clouds continue to clear for the industry. In mature markets, more and more cash-strapped local and state governments continue to look to public private partnership legislation and privatisation as a way to fund their infrastructure efforts, while emerging economies like India continue to adopt regulatory frameworks with private investors in mind.
This is not to say the last fifteen months have been easy going for infrastructure investors. Overleveraged fund managers have had to sell assets en masse, fueling a glut of activity in the secondary markets and sending shares of many publicly listed infrastructure funds through the floor. And skeptical legislatures continue to quash or threaten many deals while finding the right asset and catalysing a sale continues to be as time consuming and difficult as ever.
Still, the resilience of investment in this asset class in a broader downturn, itself an infrastructure-like quality, offers much promise to the alternative investment industry. It is with this in mind that PEI Media is launching InfrastructureInvestor.com.
Happy reading, and we hope to see you here often.