Watching and waiting

“It took a transition period of two to three years to install the euro. All of a sudden, how do you re-install the drachma? What does it mean for trade flows? It’s on people minds,” says Kelly DePonte, a partner at placement agent Probitas Partners.

Infrastructure fund managers’ portfolios do not tend to be heavily weighted to Greek (or, for that matter, Italian) assets, but Europe has on its hands another crisis of confidence and credit-worthiness and, while the prognosis for infrastructure investing remains sound, there are escalating risks that could potentially alter the landscape for the infrastructure asset class.

Infrastructure Investor asked market professionals how the Eurozone crisis has affected their business from an operational standpoint. At the very least, communications between fund managers and their investor clients have shifted. “Normally, our relationship managers chat it up with LPs. Now they are looking more at informally taking the temperature of the market,” says DePonte.

DePonte, who is in the business of matching investors with fund managers, says that signs of a fundraising slowdown appeared early in the third quarter. “The market fluctuations being driven by the Eurozone crisis began surfacing in July. That caught peoples’ attention and investors are becoming a bit more conservative as they look for opportunities,” he notes.

Fund managers appear to be patiently waiting for sidelined industry capital to return. A cloud of uncertainty is enveloping the industry, but the murk is lined with just enough silver for the future. Many players are faced with a genuine slowdown while others are positioned for better times. Until signs of clarity – or, better yet, recovery – begin to emerge, the industry will need to remain nimble in its response to the Eurozone crisis.

Access to finance

RREEF Infrastructure – with its origins in Sydney in the early 1990s – is the infrastructure investment management business of Deutsche Bank’s Asset Management Division. William Reid, head of RREEF Infrastructure’s North America group, leads a team of six infrastructure investment professionals based in New York.

As long as European banks’ balance sheets are under stress, many US infrastructure investors are having greater difficulty gaining access to financing. Coupled with a nervous investment community, asset managers are pressed even further. “Uncertainty is making fundraising around the world harder, and it’s taking much longer to do transactions because people are more reluctant to make commitments,” notes Reid.

Nonetheless, he remains optimistic about the future. “Now, it’s not permanent. It’s ‘let’s wait and see what happens’. We’re hoping that it’s only waiting and seeing for a couple more months and then people will have the confidence once again to invest,” says Reid.

In a worst-case scenario, and if another liquidity squeeze similar to the one that brought the market to its knees in 2008 rears its head, infrastructure financing from banks could dry up. “That’s what the market fears,” says Gershon Cohen, managing director and global head of project finance at Lloyds Banking in London. “If the markets sense that the politicians are not getting on top of the various crises emerging in Greece, Italy and elsewhere, there is a high risk we could return to that point.”

At Lloyds, Cohen and his team are not waiting around to see what happens and instead are resourcefully identifying new sources of capital for the future even though the firm is in the strong position being well funded and having a large retail deposit base to draw from. “A byproduct of all of this ambiguity is the amount of intellectual capital my colleagues and I are expending in looking at alternative models to attract different types of institutional investment into all layers of the capital structures of infrastructure projects,” says Cohen. “There is a lot of institutional capital in this world with investors looking for a safe home which infrastructure can provide.”

Where will the chips fall?

Jonathan Henes, a restructuring attorney and partner at law firm Kirkland & Ellis, is bracing for the chips from the Eurozone crisis to fall.

With respect to the Eurozone debt crisis in particular, the impact on Henes’ business has yet to unfold. “There is a lot of discussion and uncertainty surrounding what’s happening. Everyone is watching what’s happening in Europe and trying to anticipate what’s going to happen,” he says. 

One of the major differences between the debt crisis facing Europe today and the global credit crunch that began gripping the markets in 2008 is that today companies still have access to debt markets. Unlike before, debtor-in-possession loans and other debt financing remains an option, which could prevent a similar wave of bankruptcy filings that began in 2008 and continue to consume Henes’ time today. But a worst-case scenario would cause an increase in restructurings.

“If you had a situation where Italy was going to default and banks were forced to take a haircut, it would have ripple effects. Companies that are in the market attempting to get financing will have trouble, which would lead to more restructurings. It definitely can get busier. Everyone is watching but nobody is hoping for a banking crisis,” says Henes.

As RREEF’s Reid points out, the “capital markets both public and private are inter-related globally”.

Tumultuous

Susanta Mazumdar is portfolio manager of the T. Rowe Price Global Infrastructure Fund, a mutual fund that must navigate through tumultuous and volatile equity markets. His fund’s performance has been buffeted by Eurozone headwinds. Nonetheless, Mazumdar has no intention of abandoning the front line.

“We have positions in European infrastructure (which includes France, Germany, Italy and Spain.) We are adding to these exposures in a cautious manner,” he says. 

While hunting equity opportunities, however, Mazumdar is also keeping watch on the casualties that could ensue from the Eurozone crisis. “Our bigger concern is on the operational side. As Europe slows down because of sovereign debt, the risk is that it will lead to a mild recession and a consequent slowdown in air, road and port traffic,” he says. 

While there is no denying that the shaking of the Eurozone has altered the landscape for infrastructure investment professionals, and despite the skepticism that markets may exhibit surrounding the antidotes that European governments and the European Central Bank can provide, infrastructure investors are resilient.  

“We are here to help our clients put money to work,” says Reid, who believes the worst may be behind us – even though few are aware of it.  “A bell doesn’t ring when we reach a bottom.”