U.S. Infrastructure Assets Attracting Private Investors, Demand for Talent Heats Up
The U.S. has at least a $170 billion annual funding gap in addition to its outmoded land use and infrastructure models, according to a report by the Urban Land Institute and Ernst & Young. The nation’s 54,000 drinking water systems also face an annual shortfall of at least $11 billion to replace aging facilities over the next 20 years, according to the American Society of Civil Engineers (ASCE). Complicating matters, the old ways of financing and constructing public facilities through bonds and taxes just aren’t equal to the task. Increasingly, investors and politicians alike see privatization as a viable alternative.
The recent surge in infrastructure investing has led to a number of new players looking to make multibillion-dollar investments in U.S. infrastructure assets. Financial firms, including Australia’s Macquarie to Goldman Sachs, Morgan Stanley and Credit Suisse have all set up infrastructure funds or units. Now, as a growing number of firms look to capitalize on opportunities in infrastructure, executive search firm, A.E. Feldman, says infrastructure finance jobs are opening up. Demand is surging for professionals with backgrounds in investment banking as well as experience in analyzing and executing structured financings. The most sought after candidates are those with experience in infrastructure transactions and environmental engineering.
New Players
Morgan Stanley recently announced that it has raised billions to invest in infrastructure, including assets in sectors like transportation, energy and utilities.
The firm successfully closed Morgan Stanley Infrastructure Partners (”The Fund”) with $4 billion of equity commitments, exceeding an initial target of $2.5 billion.
“The successful fund-raising underscores the particular demand for infrastructure investment, and broadly, for alternative assets that generate long-term stable cashflows,” says James Gorman, Co-President of Morgan Stanley. “Infrastructure is now an important component of any asset allocation strategy; it offers portfolio diversification and the ability to invest in ‘real’ assets, with uncorrelated investment returns relative to other asset classes,” Gorman adds.
Investments already made by The Fund include Chicago’s Downtown Public Parking System, 80% of Canadian port operator Montreal Gateway Terminals, and a minority stake in the operator of Venice’s Marco Polo airport, according to Bloomberg.
The Fund raised its capital globally in North America, Europe, Australia, the Middle East and Asia. “The current challenging market conditions are creating unique opportunities in the infrastructure sector, and we are benefiting from our global footprint that is generating a strong investment pipeline across the Americas, Europe and Asia,” says Sadek Wahba, Chief Investment Officer and Global Head of Morgan Stanley Infrastructure.
Global Infrastructure Partners (”GIP”), an independent fund set up by General Electric Co and Credit Suisse Group that invests in infrastructure assets worldwide, has also announced that it has raised $5.64 billion for its flagship infrastructure fund. In a statement The Fund says the close “underscores GIP’s position as a leading global investor in, and operator of energy, transport and water/waste infrastructure assets.”
GIP has already invested in some large scale projects, including London City Airport, port facilities in the United Kingdom and Argentina, and a liquid petroleum product storage facility in India.
“In these times of extreme market volatility and ever more cautious investment strategies, the size and diversity of GIP’s investor commitment is particularly notable,” says GIP Managing Partner, Adebayo Ogunlesi.
Goldman Sachs also gathered $6.5 billion for investment in infrastructure back in December 2006, including $750 million of the New York-based firm’s own money, reports Bloomberg.
Private Equity in Infrastructure
In the past decade, private investment in infrastructure assets, including transportation, utilities, energy, water and telecommunications, have been increasing in the US, Europe and emerging markets. Private parties are increasingly contributing capital as well as operating expertise.
Despite offering lower growth than traditional private equity deals, infrastructure assets such as utilities, toll roads, water systems and airports are attractive to private investors because of their stable cashflow. Infrastructure is considered by most investors to be long-term, inflation proof, and run contrary to business cycles.
Today, the critical need for more and updated infrastructure coupled with continuing volatility in other asset classes is opening the door to private investment in public infrastructure - or public-private partnerships (P3).
These arrangements enable the private sector to finance, design, construct, and sometimes operate and maintain, public facilities infrastructure assets and services that traditionally have been provided by government.
The WSJ recently highlighted a potential lease deal for the Pennsylvania Turnpike, which includes more than 500 miles of highway stretching between Pittsburgh and Philadelphia that carry about 190 million cars, trucks and commercial vehicles annually. Pennsylvania could raise as much as $18 billion by leasing the state’s major highway system to private investors, who would charge tolls and fund the system’s upkeep, reports the WSJ, citing Morgan Stanley research.
Potential bidders include units of Spain’s Grupo Ferrovial SA, Abertis Infraestructuras SA, Australia’s Macquarie Group Ltd. and Spanish construction giant Actividades de Construcción & Servicios SA. If completed, a lease deal would be the latest in an increasing number of infrastructure agreements that put U.S. roads and airports under private control.
Proponents of PPPs say the potential benefits include cost reductions, better design, faster construction and better performance. Deloitte reports that more than 25 states now have PPP-enabling legislation on their books.
Infrastructure Boom to Continue
Aaron Visse, Co-Manager, of the Kensington Global Infrastructure Fund which started up in June of 2007 told U.S. News & World Report that the boom in infrastructure investing is likely to continue.
“Infrastructure is pretty much an accepted asset class in Australia, Europe, and Asia. People are now starting to figure that out in the United States. We need more infrastructure spending, the government can’t pay for all of it, so you’re going to see an increased level of things like public-private partnerships in this country. You’re going to see more assets coming into the public markets here, similar to what’s happened in other places of the world,” says Visse.
