PE Firms Drawn to Infrastructure, Alternative Energy - PART 1
Private equity firms are expanding their hunt for deals. A new survey conducted by Private Equity News shows they are going after alternative energy and infrastructure investment - sectors in which they have not traditionally been active - in order to bolster returns threatened by the credit crunch, according to a report Dow Jones Financial News report. Nearly half of those polled, 41%, say they are looking to boost their exposure to infrastructure investments.
PART 1: Increased Appetite for Infrastructure
From roads, bridges and tunnels to schools, hospitals and power plants, investments in global infrastructure have garnered a significant amount of attention. This week, transportation infrastructure takes center stage the National Governors Association meeting in Washington. Several governors urged President Bush, lawmakers, and Presidential candidates to support a major spending program to take steps to repair U.S. roads, bridges, rail lines, and water systems.
The governors, part of a new coalition called Building America’s Future, estimates the price tag on national infrastructure will hit $1 trillion over the next five years. They also contend that state governments cannot go it alone. At the Governors Meeting, U.S. Transportation Secretary Mary Peters recommended using private-public partnerships and said at the meeting that $400 billion in private equity was available for roads projects, according to Reuters.
As the cost to maintain and develop infrastructure mounts, state and local governments are increasingly reaching out to private investors for funding, giving way to a slew of new infrastructure funds. As global investors seek to capitalize on opportunities in infrastructure, executive search firm, A.E. Feldman, says the trend is creating opportunities for qualified candidates. The recruiting firm says infrastructure finance jobs are opening up. The firm adds that the most sought after candidates are those with experience in infrastructure transactions and environmental engineering.
Infrastructure is a core element in the growth and development of any country, including power plants, public telecommunications systems, water purification projects, airports, railroads, toll roads and shipping terminals. Typically governments have been the sole providers of such services, but infrastructure has caught fire as an investment concept as more public-sector projects are in need of private-sector expertise and capital.
In the U.S. alone, an Urban Land Institute survey of 30 state transportation planning directors, a staggering 83% say that the nation’s transportation infrastructure is not capable of meeting the nation’s needs over the next ten years. The respondents warned that 97% of roads, bridges and tunnels and 88% of transit/rail systems will require at least moderate improvement in the years ahead. Furthermore, the ULI report projects that an estimated $185 billion in additional funding will be required for road systems over the next five years alone. (Globally, the ULI projects that number will skyrocket to more than $1 trillion each year.) The ULI states, “The state of deferred maintenance is so gargantuan nobody knows where to begin.” States have been putting off these issues to fund other needs. People will still use roads until they can’t be used, and as long as the roads work they can put it off.
As a result, private investment in public infrastructure - or public-private partnerships (PPPs) - has emerged as one of the most important models employed by many governments to rebuild the nation’s infrastructure. A study co-published by the Urban Land Institute and Ernst & Young contends that this privatization, already widespread in Europe, is gaining traction in the U.S., particularly in the construction, management and operation of toll roads, bridges and tunnels. The report says investment funds, sponsored by global investment banks, private equity firms, and institutional money managers are becoming a rapidly expanding source of private funding. The global investment pipeline, flush with cash, eagerly shifts some flows to the United States as Americans begin to realize the scope of future infrastructure requirements and the size of funding shortfalls. Legislation has already been passed in 28 states enabling private market investment in infrastructure.
Buyout groups raised 19 infrastructure funds worth $29.9 billion last year, almost double the total raised in 2006, according to Dow Jones Financial News citing, Private Equity Intelligence. According to The McKinsey Quarterly, from 2006 to mid-2007, private investment funds raised an estimated $105 billion for infrastructure projects. Today, U.S. News & World Report states that major banks and private equity firms have established sizable pools of cash to invest in infrastructure and reports that 72 new funds have opened in the past 15 months. Citing research from Stanford University, U.S. News & World Report says those funds are expected to raise $120 billion in capital.
McKinsey also states that the value of infrastructure buyout deals has jumped from roughly $20 billion in both 2003 and 2004 to a staggering $106 billion last year. The volume of the developed world’s remaining opportunities in road projects won’t satisfy investor demand over the next three to four years. More specifically, in North America alone, the competition for road projects has become increasingly heated
Industry analysts believe the increased interest in infrastructure may be the result of a reduced tolerance for risk among. Infrastructure is considered by most investors to be long-term, inflation proof, and run contrary to business cycles.
