Amid the credit chaos, for infrastructure funds it seems to be business as usual.
But, notes Tony Jackson in his Monday column, there are few assets to buy – and a lot of money chasing them.
Collectively, the money raised from investors and not yet spent is estimated at $150bn-$200bn. If the usual leverage is still available on top, the end result could be a bubble.
Premiums have been building over regulated asset value, culminating in 30 per cent-plus for Southern Water. Dieter Helm of Oxford University, argues that the regulators have simply got their sums wrong and investors are making the rational assumption that this will persist indefinitely. The funds use far more debt than a regulator’s standard model allows, so collect a risk premium on non-existent equity.
The rationale for infrastructure investing is powerful, says Jackson. But the snag is political. Infrastructure involves precisely the kind of assets that opponents of privatisation feel most passionate about. And there is a tension between investors’ desire for safe, low returns from infrastructure, which has driven the enormous growth of funds, and what’s on offer. If you build an airport in a developing country, you are taking on construction risk, operating risk, political and regulatory risk, notes Jackson. You have left the world of infrastructure funds for the world of private equity.
The market has got ahead of itself, he concludes:
Some claim that the asset shortage will clear itself in the next couple of years. Good luck. But the bubble is inflating in the meantime. That may be a magnet for some investors these days, but it is not good news for a fledgling industry with a reputation to build.