Private equity eyes Infrastructure projects

Date: 01-07-2008
Source: Financial News

Private equity investors have been kept out of the oil-fueled boom in the gulf. With local sovereigns and companies flush with petrodollars, there has been little need for injections of capital from the western buyout industry.

But such is the scale of the infrastructure being developed in the Middle East that local states are starting to look for outside investors.

A spokesman for Abraaj Capital, which manages the largest private equity fund dedicated to infrastructure in the region, said: “Governments are increasingly seeking private capital to fund projects as the total value of investment required exceeds their available resources, even after taking into account the budget surplus arising from the recent boom in oil prices.”

Consultancy McKinsey estimated the value of planned infrastructure projects in the Middle East will reach $3 trillion (Euros 1.94 trillion) by 2010. Private equity investors are hoping to get a piece of the action.

With the credit crunch choking dealflow in Europe and the US, the prospect of low-risk infrastructure projects offering steady returns, backed or guaranteed by Gulf states, is alluring.

A survey by consultancy Deloitte this month found 94% of private equity investors expected Middle East activity to rise this year.

Abraaj closed its $2bn fund at the end of last year, sponsored by Deutsche Bank and Bahrain-based Ithmaar Bank. Gulf One Investment Bank is looking to raise a similar amount, according to research house Private Equity Intelligence.

Few private equity funds have been raised to target the region to date, with research house Preqin recording six funds launched since 2003.

The limited supply of private money has matched the thin demand, said Mark Lemmon, chief executive of Mena Infrastructure Fund, which is targeting $500m for investment in the sector with sponsorship from HSBC, Abu Dhabi state entity Waha Capital and Dubai International Capital, an investment arm of the Government of Dubai.

Lemmon said: “Ample private equity has been organized by financial investors to address these opportunities. A $2bn fund alone could realistically support $40bn in investments part-financed with debt.”

He said this would offer investors low-risk opportunities with predictable cashflows, typically yielding returns of 15%. However, private equity funds raised to date have struggled to put their capital to work, much to the consternation of investors.

A respondent quoted in the Deloitte survey said: “There are a number of large projects in the infrastructure sector coming up. In general, there is a lot of liquidity in the market. A lot of the private equity funds raised in the past one and a half years are so far uninvested—I would estimate that figure to be 90%but management fees are still being paid so there is pressure to invest.”

Lemmon admitted progress has been slow but said a tipping point had been reached: “There has until recently been a slow pace of transactions where private equity, sourced from financial institutions, is required. I see this accelerating now. It takes time for projects to get contracted and further time for contracted deals to reach completion of construction but there is a now a substantial history of things being completed in project finance in the region. The time is right for funds such as ourselves.”

According to Lemmon, commitments for project finance in the region last year were valued at $30bn to $40bn, out of $200bn committed globally. This was made up of about $10bn in equity, half of which came from private sector sponsors, and $30bn in debt. The money will be spent over the next three to four years.

There is no doubt about the scale of investment required in infrastructure.

Abraaj Capital said power and utilities demanded at least $155bn in fresh investment, while per capita water availability in the region was only 17% of the global average in 2006, necessitating $133bn of investment.

Demand for healthcare and education was acute, with Egypt representing a growth economy in both these areas. Saudi Arabia was leading the development of transportation and ports as well as infrastructure around the production of petrochemicals, according to Abraaj.

Lemmon said: “Our opportunities exist across the spectrum—thermal power, desalination, wind power, energy, schools, hospitals, waste and wastewater treatment plants. You can have large power and water desalination projects in Abu Dhabi and Saudi, where governments invest alongside the private sector, or those with no government investment, as in Oman.”

Government-owned companies often have some contractual involvement, according to Lemmon, who said Mena Infrastructure's first investment in Egyptian port Alexandria International Container Terminals had the state port authority as a small minority shareholder and relied on a government concession to operate long-term.

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