by Agnes a Paris
Tue Dec 5th, 2006 at 05:20:44 PM EST
Picking up on Jerome's recent front page story on the infrastructure bubble, a few additional facts from the same source, ie Standard&Poor's "pay per view" ratings and research service.
My attention in their research issued on November, the 30th was caught by the fact that the culprits they named were clearly the funds that invested into infrastructure assets, the core topic not being the intrinsic worth of the infrastructure projects themselves, but the dazzling amounts of money investors were ready to put on the table in Merger&Acquisition deals to get hold of the assets.
The asset is only the excuse, the selection of which varies according to global investors' mood, hence debt to EBITDA multiples witnessed today in infrastructure acqusiiton deals. The width of the 12x to 30x bracket indicated by S&P speaks for itself. Over a 7x threshold, the business is start-up like ie no one would pay ten times the EBITDA for a running concern.
It is clear that, as a result of rampant demand, the infrastructure sector is in danger of suffering from the dual curse of overvaluation and excessive leverage--the classic symptoms of an asset bubble similar to the dotcom era of the last decade. When that particular bubble burst many investors lost out.
What's that story again about those who cannot draw the lessons of the past ?
Credit quality is coming under downward pressure as a growing number of infrastructure assets-especially utilities, airports, ports, and toll-road operators-are being privatized or sold or auctioned by existing owners that wish to take advantage of the voracious appetite of infrastructure funds.
So why this frenzy towards infrastructure ? The answer : North America's pension funds.
Infrastructure funds are managed vehicles through which investors are able to gain exposure to the underlying characteristics of a portfolio of infrastructure assets. The global trend toward investing in such assets was started in Australia and Canada with large, dedicated funds being launched in the sector by such established players as Macquarie Infrastructure Group; Babcock & Brown Ltd.; and large pension funds including the Canadian Pension Plan Investment Board and Borealis Infrastructure Trust part of the Ontario Municipal Employees Retirement System.
Pension funds in particular have been driving demand for infrastructure assets, attracted by their essential long-term nature, strong competitive position, and stable and relatively strong yield returns. Infrastructure assets have also demonstrated a low correlation to equity markets and other major asset classes, helping to provide valuable diversification to fund managers. Therefore, the long-life, inflation-indexed returns provide a very good match for the long-dated liabilities of pension funds.
Increasingly these Australian and North American funds have turned their attention toward European infrastructure assets. They have been attracted by the favorable regulatory systems for utilities and transportation infrastructure companies and opportunities to invest in the growing public private partnerships (PPPs) market.
The U.K., with the most established PPP sector in Europe, and Italy have seen the most substantial amount of investment, claiming 26% and 20% of all infrastructure activity since 2003, respectively.
Indeed, the Australian, US and Canadian PPP markets are not mature enough for pension funds to tap their local infrastructure assets. So, at the risk of being provocative, my anwser to the bubble is the following : let pension funds raise money on their local markets instead of tapping those abroad.
The US economy fuelled by debt placed abroad ; rings a bell ?
Interestingly, S&P flag out one specificity of infrastructure assets that might have been overseen by private equity investors.
One important aspect to consider is public-policy issues that might flare up under private equity ownership given investment strategies and highly leveraged acquisition structures. Infrastructure companies are typically regulated monopolies providing essential public services and, as such, often benefit from strict supervision and oversight by government or public sector entities.
There could, therefore, be a conflict between the interests of the private equity owner and the governments or regulators that are trying to protect the interests of the consumer.
Looking forward to witnessing that...