Sovereign wealth funds are queuing up to finance the West’s overhauls of crumbling roads, bridges and ports as public purse strings are loosened after a period of austerity, but they still face project delays and fierce competition for deals.
Offering strong and stable cash flows generated by service users, these investments hold huge appeal for a US$6.5 trillion industry that, with its focus on future generations, is able to lock up capital for years.
Qatar’s sovereign fund was first off the blocks this week, promising US$10 billion for U.S. infrastructure after President-elect Donald Trump floated plans to spend up to US$1 trillion on projects that will take years to complete.
Britain has flagged projects worth nearly 500 billion pounds (US$632 billion), including expanding Heathrow airport and high-speed rail, European governments are backing more spending on energy, transport and telecoms, and Canada is speaking to SWFs and pension funds to create an infrastructure bank.
Among developing economies, India has huge power and expressway projects under way.
But there are few signs yet that the imbalance between SWF demand for infrastructure assets and accessible supply is easing.
“Never have I seen such a global infrastructure deficit particularly in the OECD countries, at a time when a lot of these governments are struggling financially,” Adrian Orr, chief executive of the New Zealand Super Fund, told Reuters. “Yet third-party capital is struggling to get access.”
The fund has 3 percent of its investments in infrastructure.
Since the global financial crisis, cash-strapped Western governments have been forced to put projects on ice. Some have also resisted foreign ownership of strategic assets, with an outcry over national security forcing U.A.E.-based DP World to sell management leases for six U.S. ports in 2006.
This summer, Britain held up a US$24 billion power project on concerns over Chinese investment in nuclear infrastructure.
The difficulty that SWFs have encountered sourcing deals whose appeal has risen as bond yields have sunk and equities turned more volatile, means that almost two-thirds are underweight infrastructure relative to their target allocation, according to a study by asset manager Invesco.
A second study by research provider Preqin found that infrastructure funds, which raise money from investors including SWFs, had accumulated US$141 billion in “dry powder” to invest in 2016, an all-time high.
With so much capital chasing a limited number of deals, prices have risen, particularly for the most attractive assets.
Preqin found the average infrastructure deal size hit a record US$528 million in 2015, up from US$486 million in 2014 as many winning bids came in higher than expected.
These included the US$7.4 billion paid by a consortium involving SWFs for a 99-year lease of Australia’s TransGrid electricity network, and the US$7.3 billion paid by another group for a 50-year lease of the Port of Melbourne.
To get into the biggest deals, many SWFs co-invest with peers, and consortia comprising SWFs and major infrastructure funds, such as the one that bought a majority stake in Britain’s gas pipe network, are typical.
Now the changing mood music from Western governments heralds a flood of new opportunities, though this will in many cases mean taking on the extra risk involved in construction projects.
“Therefore investors will typically look for a higher return component than if they are improving existing facilities,” said Declan Canavan, head of alternatives EMEA at JPMorgan Asset Management.
Investors may also have to prepare for lengthy delays as governments will still need to raise funds for new projects via taxation or borrowing, while local municipalities have shown little appetite for privatization.
“There’s a limit to what a population is prepared to pay, and that won’t suddenly rise in huge amounts,” said Gershon Cohen, head of infrastructure at Aberdeen Asset Management.
Cohen, who is skeptical about how much Trump can achieve, says infrastructure is a hard sell for politicians who are often reluctant to commit to long-term projects they may not get to cut the ribbon on.
“There’s a mismatch between long-term investment decisions and short-term political thinking,” he said. “They need to bring projects forwards, waiting 30 years for a runway is quite clearly an error.”
Successive British governments have spoken about a new airport or runway in South East England since the late 1970s.
By Claire Milhench
(Additional reporting by Karin Strohecker; editing by John Stonestreet)
(This story has been edited by Kirk Falconer, editor of PE Hub Canada)
Photo courtesy of Vancouver Fraser Port Authority