Eyeing Up The Infrastructure Investment Opportunity by Gerry Jennings, AllianceBernstein
There’s intense demand for capital to build and modernize the world’s infrastructure. That’s good news for investors, but accessing the opportunities isn’t a straightforward proposition.
The Infrastructure Spending Gap
Spending on infrastructure in parts of the emerging world has hit staggering totals over the last couple of decades, while infrastructure investment in the developed world has lagged well behind.
As a result, many advanced economies are seeing their ageing infrastructures start to crumble. Nearly 45% of London’s water mains are more than a century old. Many of Germany’s autobahns are nearing the end of their 50-year lifecycles and need repairs and upgrades. And some of Italy’s elderly airports are creaking at the seams after more than 20 years of limited maintenance spending.
Why is the developed world missing out on the infrastructure investment boom in emerging markets? The global financial crisis has inflicted a double whammy: a weak economy and heavier regulation. Tough economic times have obliged cash-strapped developed-world governments to cut spending on public investment. And new regulatory constraints have led banks to pull back from their role as major providers of finance to infrastructure companies.
Nearly US$60 trillion will be needed to finance infrastructure development worldwide through 2030, based on forecasts (Display). This translates into an annual gap of about US$500 billion between investment needs and available public funds. The end result is a massive infrastructure investment shortfall.
Less Pep, Better Predictability?
The good news for infrastructure borrowers is that many institutional investors, including pension schemes and insurance companies, are looking to invest in long-term infrastructure assets. These include water, electricity and gas transmission and distribution facilities, seaports, rail, airports and roads.
They provide essential services and tend to operate within mature regulatory frameworks. This gives these assets strong defensive characteristics, helping them deliver steady and visible cash flows. As a result, they have fewer ups and downs than publicly traded equities or bonds over economic cycles.
Infrastructure investing used to focus on equity, but this is changing as a decline in bank lending opens up opportunities for debt funding. Privately originated infrastructure loans can offer attractive illiquidity premiums over equivalently rated corporate bonds, with lower default levels and higher recovery rates. The debt side may have less snap, crackle and pop than its equity counterpart, but growing numbers of investors are attracted to stable yields that may help them match long-term liabilities.
While it’s been growing harder to source infrastructure equity investments, we’re seeing attractive activity on the debt side. Our analysis suggests that some US$112 billion (€100 billion) in infrastructure debt refinancing will be required in Europe alone over the next 10 years or so. This suggests that there’ll be more than enough investable assets to go around—for those who know where to look.
Europe’s Rich Seam of Investable Assets
Europe offers a particularly rich opportunity set because of its relatively long history of private investment in infrastructure. This is underpinned by a stable and supportive regulatory and political backdrop as European governments try to repair their balance sheets by privatizing or selling their infrastructure assets. At the same time, European Union regulations and competition commission rulings are encouraging large European corporations to sell off their infrastructure subsidiaries—or their stakes within them.
This means Europe’s governments and its companies are providing investment opportunities in the construction of new “greenfield” projects and boosting the pipeline of established (or “brownfield”) assets for sale. In our view, the risk-adjusted return potential of brownfield investments is especially appealing. Their proven track records may insulate them from potential risks in construction, cost overruns or delays.
Accessing the Infrastructure Opportunity
So far, so good. But infrastructure loans aren’t easily accessible to most institutional investors. It’s a big challenge to establish working relationships with banks, advisors and infrastructure companies, pick promising opportunities and oversee the underlying businesses for many years.
Because of the complex nature of the infrastructure lending market, it isn’t easy to navigate. But we think in the long run the effort is worth it.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.