Friday Letter Not sexy but essential

Billions of dollars are needed to fund infrastructure projects in the US, Europe and Asia – and in the current economic downturn, governments will increasingly look to private investors to get things done.

As the world comes to terms with today's new financial order, the opportunities for infrastructure investors and their limited partners will grow as governments around the world turn to private capital to replace and extend crumbling infrastructure.

This is particularly true for economies like the United States, where many infrastructure assets like highways and wastewater systems were built in the 1950s, ‘60s and ‘70s and are in desperate need of repair.

In economic downturns, “infrastructure is the first asset class to open up the markets”, Christopher Kinney, chief executive of Babcock & Brown's Infrastructure Fund North America, told delegates this week at PEI’s Infrastructure Investor Forum in New York.

Economic turmoil naturally tightens budgets of state and local authorities, and rather than cut staff or services like garbage collection, they tend to slash capital expenditures for projects less politically sensitive.

“Infrastructure projects aren't very sexy,” Kinney said.

But they are essential. Already, many US cities and states are pushing for public private partnerships, particularly with regard to transportation projects –  a measure historically viewed with some suspicion by both the public and officials. To date, 23 US states have adopted PPP legislation for the development of transportation infrastructure, enabling firms like Sydney-based Macquarie Group and Spanish toll road operator Cintra to finance US toll roads, notably the Indiana turnpike, a $3.8 billion concession they closed on in 2006.

Despite chatter that an influx of capital into the asset class now sees too much money chasing too few deals, industry insiders say the opposite is the case.

Trent Vichie, senior managing director at The Blackstone Group and co-head of its infrastructure arm, estimates the worldwide capital stock of infrastructure assets “is somewhere in the order of $100 trillion“, while Chris Leslie, chief executive officer of Macquarie Infrastructure Partners in New York, said that only about $100 billion has been raised for global infrastructure investment in recent years – nowhere near enough to meet governments’ needs.

Naturally, more money will be raised, as limited partners increasingly look to invest capital in “safe” places, with infrastructure investments typically providing stable and predictable cash flows that have high credit quality and offer some protection against inflation. It also delivers valuable diversification within an allocation model.

And like their private equity cousins, infrastructure funds look set to evolve – witness this week’s revelation that Macquarie, the largest private owner and operator of infrastructure assets globally, will launch an A$1 billion (€500 million; $700 million) infrastructure fund of funds. This is an obvious and important addition to the investment proposition, enabling institutional capital to access a host of specialist funds without being obliged to develop deep in-house selection skills themselves.

Macquarie's entry into this burgeoning segment will also deliver valuable, extra credibility at a time when some market participants question the fee structure for such a product.

These are important times for infrastructure investors and financiers and we expect more private equity (and real estate) fund managers to develop expertise in this neighbouring asset class too.

PEO will continue to cover infrastructure investing news selectively, but you may not be surprised to learn that we have this week launched a sister news site, InfrastructureInvestor, to aggressively follow this dynamic community of investors, fund managers, developers and financiers worldwide. Do take a look.

PS Next week, PrivateEquityOnline launches its “Notes from the frontline” guest commentary series. Each Wednesday a prominent private equity professional will give their views on how the global financial crisis is affecting the industry, and what lies ahead. They will make compelling reading.