A Standard & Poor’s report has warned that interest from private equity firms in the infrastructure sector has created bubble conditions. Infrastructure does not fit with a private equity investment’s typical three to five year lifespan, the report claimed. It added that infrastructure is under strict supervision from the government, which could create a conflict between the private equity owner and public sector authorities.
The rise in consortium deals has enabled infrastructure investment to flourish. This month a consortium comprising Credit Suisse, GE Infrastructure and American International Group bought London City Airport for a reported €750 million ($990 million) from owner Dermot Desmond, an Irish billionaire.
Michael Wilkins, managing director of Standard & Poor’s European infrastructure group, said: “It is clear that, as a result of rampant demand, the infrastructure sector is in danger of suffering from the dual curse of over-valuation and excessive leverage – the classic symptoms of an asset bubble. When that bubble burst many investors lost out. Those who can remember the past are condemned to repeat it: due diligence and robust credit analysis of assets should be undertaken in the infrastructure sector to prevent similar mistakes.”
Standard & Poor’s estimated that $100 billion to $150 billion of money has been raised by funds globally and is waiting to be invested in suitable assets in the sector. In 2006 there has been more than $145 billion of merger and acquisition activity in the sector, a 180 percent increase since 2000.
The UK, which has the most established public-private partnership market in Europe, and Italy have seen the most substantial amount of investment, claiming 26 percent and 20 percent respectively of all infrastructure investment since 2003.