In January 2005, the City of Chicago made a bundle. Following a competitive tender process, it awarded the Skyway Concession Company (SCC) a 99-year lease to operate the Chicago Skyway Bridge, a 7.8 mile toll road connecting the Dan Ryan Expressway to the Indiana Tollway. Owing to the long lease period, the deal valued the road at more then 60 times pro forma cash flow. Chicago, exceeding its expectations, received $1.83 billion (€1.43 billion) in cash.
SCC, owned jointly by Spanish infrastructure giant Ferrovial and Macquarie Infrastructure Group (MIG) of Australia, refinanced the asset six months later through a highly successful $1.55 billion securitisation. According to MIG, the deal is performing to plan and the toll road continues to benefit from new investment.
Success stories such as Skyway go a long way towards explaining the ongoing rise and rise of public private finance. Whether you're talking airports, toll roads, rail tracks, ports, schools, hospitals, parking lots, bridges, tunnels or utilities: cash-strapped public sector organisations the world over are discovering that private sector financiers are only too willing to relieve them of their funding commitments, provided an adequate return on investment is on offer.
Neither is it hard to see why private equity firms are increasingly drawn to the sector: big steady cash flows that can be locked in for long periods of time and respond well to gearing are attractive to buyout firms. While the phenomenon of asset class convergence is bringing private equity closer to hedge funds, it is also breaking down the barriers that separate the industry from infrastructure finance.
Spearheading the trend on the global stage are the likes of Goldman Sachs and The Carlyle Group, which are building sizeable franchises in this area. European sponsors with an appetite for infrastructure deals include 3i, Barclays Private Equity, Patron Capital, Star Capital and Terra Firma, which at press time featured prominently in the £7 billion battle for Thames Water, a UK utility.
Also on the rise are so-called Private Finance Initiative (PFI) companies such as Henderson Private Capital Infrastructure, I2, Innisfree and SecondaryMarket Infrastructure Fund, an investment vehicle backed by Star Capital. PFI consortia provide capital along with construction and contract management services to public sector projects in the UK. Since its inception in the late 1990s, PFI has delivered nearly 200 new healthcare facilities and more than 200 schools, among hundreds of other projects. According to the National Audit Office, approximately 80 percent of PFI undertakings were completed on schedule and on budget, whereas roughly 70 percent of government-led projects finished late and over budget.
With £26 billion of new projects currently planned, PFI is bound to engage financiers for years to come. Similar initiatives are gathering momentum in continental European markets including Italy, France, Finland, Greece and Spain.
No wonder practitioners are intrigued. Says one London-based private equity professional: “I think we are now in the very early stages of an infrastructure-driven revolution in investment and finance, and I think in another five years or so it will become its own fully-fledged asset class, likely to be far greater in scale than the private equity world.”
From the point of view of private equity firms, there is a drawback however: participation in public private partnerships can bring with it the same level of scrutiny – and criticism – that public sector institutions are routinely subjected to.
To illustrate: because taxpayers' money is involved, PFI in Britain is highly controversial. Many people find it galling that private investors should turn a profit on a publicly funded new school building, especially if sophisticated structuring means the investment is also tax-efficient.
In one high-profile case in May, a consortium comprising John Laing Lasalle, Innisfree, 3i, Barclays Infrastructure and Serco was labelled “the unacceptable face of capitalism” by the House of Commons Public Accounts Committee after making a significant profit on a PFI hospital refinancing. In August, a Channel 4 television documentary accused PFI of “draining hundreds of millions of pounds from frontline services, while creating a £4 billion-a-year industry and a new elite of publicly unaccountable PFI professionals”.
Given the momentum currently behind public private finance, in Britain and elsewhere, negative publicity will not stop it in its tracks. But private equity investors looking to enter the game should be aware that public sector sensitivities need to be taken into account.