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Infrastructure fund investment continues to boom

Monday 18th April 2011
 Private sector investment in infrastructure has grown substantially in 2011, with infrastructure funds playing a pivotal role.

However challenges from direct investors may lead to consolidation in the sector, according to a survey by Deloitte into the investment plans of infrastructure fund managers.

A survey of more than 30 fund managers across Europe, many of whom manage, advise or act on behalf of multiple European and global funds, showed that, infrastructure is now clearly seen as a separate and distinct asset class within the alternatives space.

The majority of funds indicated that they intend to focus their investment strategies in the transport and energy sectors with a preference for roads, rail, airports and ports, regulated gas, electricity and water utility assets, with specialist funds continuing to be the significant investors in renewables and PPP/PFI infrastructure assets.

James Riddell, infrastructure funds partner at Deloitte, said: "The survey findings indicate a distinct market evolution. The infrastructure funds market has developed to be less reliant on highly leveraged structures for its returns.

"Rather the market has almost uniformly as a sector shifted focus back to core infrastructure assets that can deliver the stable secure long-term cash flows desired by their traditional pension fund investors.

"The start of 2008 saw a clear road ahead for infrastructure fund managers, now think there is a fork in the road, where investors and fund performance will ultimately direct which path the fund managers will take.

"The best fund managers will lead the growth in private sector infrastructure investment and head a smaller pool of active fund managers than exists today by virtue of their ability to raise multiple funds and deliver superior returns for their investors.

"Conversely, fund managers who struggle to raise new funds are likely to become specialist asset managers, returning cash yield and ultimately proceeds from asset sales back to their investors. We expect some consolidation among the managers in this position with some highly regarded asset management operations being created as a result."

The growth in the number of fund managers entering the infrastructure fund market, combined with the changing approach of pension fund investors, has had a significant impact on the ability of infrastructure funds to raise new capital and invest existing committed capital. This is a consequence of new and existing fund managers competing for the mandates from a more select investor pool.

Riddell outlined some other trends which could manifest themselves over the next three to five years: "There are a handful of demand-exposed assets, where the combination of ongoing poor operational performance, optimistic growth assumptions not being achieved, together with highly leveraged acquisition structures will result in some restructuring taking place as debt packages come up for maturity and refinancing.

"In some cases, infrastructure funds may have to make capital calls to facilitate equity injections; however, the recent return of the high yield bond market may to some extent mitigate this risk. Generally, we do not see infrastructure portfolios giving rise to many defaults.

"The debt markets have reopened for business in respect of quality assets. Terms and pricing will likely remain tight for the next few years and there will be no significant shift in the current balance between demand for debt from the infrastructure funds and appetite to lend from the banks."

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Mike Jones

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