What is Infrastructure?
“Infrastructure” in the context means local and international private equity real estate investments primarily focused on an income stream. Infrastructure funds may invest across several asset classes including transport, utilities, renewable energy, social infrastructure (e.g., hospitals), water and power generation. The industries identified by Fintalent’s Infrastructure consultants include airports, bridges, buildings, tunnels and toll roads; they also include a wide range of providers of public services: electricity grids, gas networks and water treatment plants; and companies without direct access to income streams but with a proven track record in the sector such as telecoms operators or those working on electronic network security.
What is infrastructure in private equity?
Infrastructure in Private Equity is the business of providing long-term investments for companies. In other words, it manages the assets (equity, debt and cash) that are required by a company to continue operating its business. The main objective of infrastructure in private equity is to build powerful capital structures for those companies that are capable of creating sustainable value over time.
Although these businesses might not see their initial returns for years or even decades following the investment, Infrastructure in Private Equity believes that it can help provide lasting growth to both company and investor alike.
The Private Equity Infrastructure industry has continued to grow rapidly over the past few years, with total fund raising reaching a record high of US$2.1 trillion. The rapid expansion in this industry has led to a number of new firms entering the market and an increasing number of private equity investors entering their first fund-raising period.
Infrastructure investment has grown over the past few years as investors have become more confident in the sector and have encouraged infrastructure funds to pursue a broader range of assets and sources of income. The growth in this area is partly due to the fact that investors are expecting returns on investment on these assets to remain low. The total fund-raising volume for the infrastructure sector over the past five years is around $600bn, and previous studies have shown that infrastructure funds raise around 45% of their capital from institutional investors. The majority of infrastructure funds are non-fund of fund structures.
“Infrastructure funds were the first asset class to really draw institutional investors in on a significant scale, and now with the outcome of the crisis, that participation rate has continued to make huge strides” “Private equity funds investing in infrastructure are predominantly long-only vehicles, rather than actively managed portfolios. As a result, many of the institutional investors that participate in these funds tend to be positively geared as they invest into these infrastructure funds rather than directly into infrastructure assets.”
The Infrastructure industry has experienced rapid growth over the past ten years, fueled by demand from institutional investors such as pension funds and sovereign wealth funds to invest their international reserves into high-growth assets. In the United States, one of the main drivers for this growth has been pension funds and insurance companies, who are looking to diversify away from traditional asset classes such as fixed income and real estate.
Data shows that over 45% of private equity funds invested in the infrastructure sector came from institutions with a further 40% coming from investors. Institutional investors have long been tapping into the infrastructure space, but in recent years they have moved away from direct purchases of infrastructure assets to investing through private equity funds. Infrastructure is one area where private equity has moved aggressively in recent years, with many firms launching new asset classes and platforms.
Perhaps unsurprisingly, there is a growing trend for private equity investors to invest in infrastructure assets. Infrastructure assets are high-quality, stable and long-term investments with stable cash flows. When combined with its low risk profile, infrastructure has become an attractive alternative to other forms of investing such as mergers and acquisitions (M&A). There are many reasons to invest in infrastructure, including that the underlying business is well known by the investment group (“household names”) and has a relatively predictable structure (“relatively predictable structure”). The number of new build assets is limited, making it difficult for new entrants to compete. As a result of these characteristics, this form of investing has become more attractive to private equity investors over the last decade.
One of the key drivers behind this growth has been technological innovation and its use in sectors such as energy and transport. These sectors are where infrastructure investors have increasingly been investing their money as technology is allowing them to become more productive, efficient and often cheaper (for example renewable energy supply such as solar and wind power).
Infrastructure Investment Trends
As with most sectors, infrastructure has seen a steady increase in investment. In 2013 alone, US investors spent $50.1bn on infrastructure assets making it their third largest sector after M&A and private equity. This was the highest volume infrastrucutre deal since 2010. The deal value is more than double the level of investment seen in 2012 when $19bn was invested by private equity investors in infrastructure assets compared to 2013’s $40.1bn. Total deals for 2013 increased by 275% year on year compared to last year’s paltry increase of 35%. This is no doubt a result of the large number of infrastructures assets in Europe and North America hitting the market at a time when interest rates are low and their value relative to their purchase price is high.
Key Drivers of Infrastructural Investments
The majority of investment was driven by transportation and utilities, contributing $16.0bn dollars (41% of total). The transportation sector includes airports, bus depots, railroads, toll roads, ports and shipping terminals. The utilities sector includes electric power generation facilities, oil refineries and natural gas pipelines. It is no surprise that these two sectors have dominated infrastructure investment in recent years. They are industries that most of us can relate to. Every day we use the products and services provided by transport and utilities and our reliance on these industries is growing.
The transportation sector continues to be a driver of infrastructure investment. Infrastructures assets such as railroads, airlines, ports, airports and pipelines that support the transportation industry are likely to be volatile but one of the hidden but recurring characteristics of private equity investing is that changes in performance are common after a company has been purchased by outside investors. In order to fix troubles caused by poor investments or funding gaps, private equity owners typically spend significant time and money revitalising the portfolio companies in order to strengthen their cash flow.
As a result of this, it is no surprise that infrastructure investment in the transportation sector has grown steadily over the last decade. In 2012, transportation infrastructure assets made up 30% of total infrastructure assets which is almost double what it was in 2008. The growth in this sector has been driven partly by investors being attracted by the potential for strong returns as well as a lack of early-stage venture capital (VC) funding available to support new innovations. As seen over time, infrastructure investing is likely to continue to grow at a steady rate driven by technological innovation and growing global demand and supply pressure.
The US has historically been a leader in private equity investments, contributing $17.7bn or 49% of all infrastructure assets invested globally by private equity firms in 2013. This was up from $13.5bn in 2012 but down slightly from $18.4bn in 2010. The European Union, which includes mainland Europe and the United Kingdom, contributed $9.3bn or 30% of the total infrastructure assets in 2013, with an increase from $8.2bn in 2012 but a decrease from $12.6bn in 2010. However, given that the population of the EU is more than double that of the US; this still shows that Europeans are investing much more in infrastructure than Americans as a percentage of private equity investment capital outlay.