Deloitte: Infrastructure also faces Crunch

Date: 19-03-2008
Source: Reuters

Infrastructure is viewed as safer than other industrial sectors in a recession but investors in this area also face challenges from harder financing and pressure on their returns, said a report by Deloitte Consulting.

Intense competition for traditional infrastructure-type assets in Western Europe has led to a rise in prices and is set to reduce returns, the consultancy report said on Wednesday. Despite traditionally offering lower growth, infrastructure assets such as utilities, toll roads and airports are attractive to financial bidders like banks and pension funds because of their stable cashflow.

However woes in the wholesale debt market during the credit crunch are making it more difficult for even infrastructure investors to borrow, curtailing their ability to fund deals. Some funds "will be held back in the short to medium term by formal restrictions on what currencies they can invest in and the restrictions of reduced liquidity from increasingly cautious lenders unwilling to consider these opportunities at present," said Deloitte infrastructure funds partner James Riddell.

Debt tends to be important in infrastructure deals because buyers typically borrow a lot against the asset to fund their deals, not unlike private equity has done in recent years in riskier sectors. They can then issue debt, for example bonds, on the back of the acquired company, and use the stable cashflow infrastructure businesses generate to pay the interest.

Deloitte added that a record amount of cash is chasing infrastructure, with 20 billion pounds ($40.28 billion) raised in the last two to three years by London-based infrastructure funds to invest in such assets across Europe.

In recent years, companies like Australia's Macquarie and rival Babcock & Brown, as well as pension funds like Ontario Teachers' Pension Plan have looked at opportunities in Europe as they seek to invest in the continent's supply of regulated infrastructure. In the meantime, banks like Goldman Sachs and UBS have also set up infrastructure funds.

However in order to reach higher returns, Deloitte added infrastructure funds could consider looking to less traditional infrastructure assets and new markets like those in emerging economies. "Research suggests that those funds prepared to move outside their comfort zone, whether it's tangential infrastructure assets, greenfield infrastructure investments, or geographies with greater sovereign risk, may be able to grab a bargain before the rest of the pack catches up," said Riddell.