Indeed, government and economic conditions are the primary challenges to providing needed infrastructure, according to KPMG's 2009 infrastructure survey. Of the 455 infrastructure executives surveyed, 76% of the U.S. respondents cited governmental effectiveness as a barrier and 74% cited economic conditions. Sixty-nine percent of international respondents indicated governmental effectiveness and 63%, economic conditions. For both groups, these issues were of more concern than financing: 69% in the U.S. and 60% outside the U.S., according to the survey results.
The second condition is financing.
While financing has not been a problem for certain types of projects — for example, more mature infrastructure projects with cash flows that are easier to calculate — that doesn't mean financing infrastructure has been a breeze in the last 18 months.
“Today, you need a group of lenders,” said Macquarie's Mr. Mentzines.
Some managers see possible opportunities in infrastructure lending. Historically, Macquarie has not provided infrastructure lending except for using balance-sheet assets to bridge loans. However, the bank generally is “pushing into the lending space,” which might include lending for infrastructure projects and real estate, Mr. Mentzines said.
Energy Investors Funds, which invests in so-called “hard assets” such as power plants, pipelines and transmission lines, has obtained $3 billion in debt for global projects in the past 24 months, said Terence L. Darby, the New York-based managing partner. For example, on July 22, EIF closed on almost $600 million of bank financing in the form of increased credit facilities and extended debt maturities for three of its funds. The firm invests in projects with long-term cash flows, he explained.
“Green-field projects,” meaning development projects in which future cash flows are less certain, have a more difficult time getting funding, Mr. Darby said.
Infrastructure as an investment strategy has grown quickly over the past 15 years.
The world is in the beginning of the third wave of infrastructure investments and managers.
The first started around 1994 with the Australian banks, which amassed large quantities of infrastructure projects and spun the portfolios into listed infrastructure companies on the Australian stock exchange at large profits. The jet fuel for this high-powered play came from Australia's mammoth pension funds. A steady stream of turnover and transactions kept the Australian banks' balance sheets healthy until the worldwide economic recession put on the brakes.
The next wave started when investment banks around the world began relying on the flow of transactions to generate fees, both on the equity and debt sides.
The third wave of managers is a mix of private equity, real estate and newly minted infrastructure investment managers. KKR, The Blackstone Group LP, Neuberger Berman Group LLC, Starwood Capital Group LLC and Deutsche Bank AG's RREEF Alternative Investments have all started infrastructure businesses in the past 12 to 18 months.
Most of these managers are using a private equity-style fund model rather than a publicly held fund strategy.
Even the granddaddy of infrastructure investing, Macquarie Bank, is switching from a listed fund model to a private equity fund model, the firm acknowledged in a news release issued last month. Within the past few months, it has started selling the rights to several of its Australian-listed vehicles, amassing the majority of new capital through private equity-style infrastructure funds. Its North American business only offers private equity-style infrastructure funds. “There was a gap between share prices and the real value of the assets,” said Alex Doughty, New York-based Macquarie spokesman. However, Mr. Doughty was adamant that the firm has no plans to sell its rights to infrastructure in the U.S.
Investors and money managers entering this third wave are discovering that infrastructure is not a homogeneous asset class. Indeed, these days “infrastructure” is somewhat of a term of art. Money managers are dumping everything into it, from energy producers to “infrastructure-related” investments in engineering, construction companies, architectural firms and merchant energy generators that are exposed to the swings of the public commodities markets.
Investors are finding that not all infrastructure projects have the same risk-return profiles. Investors expect that the long-term assets will produce steady returns with low level of risk. But private equity-style funds have private equity definitions of “long-term”— three to seven years.
Energy Investors Funds offers private equity-style funds that invest in the U.S and its funds have five- to seven-year investment lives, Mr. Darby said. The projects that best match this lifespan are green-field deals where more development is required, which have the potential for higher returns but also carry much higher risk.
“A lot of private equity funds look at five to 10 years and then flip. They will take on risk to develop an asset and they want to get paid for development risk,” said Mike Lucki, global infrastructure leader, Ernst & Young LLP, New York. “Pension funds want infrastructure to fit the profile of their (beneficiaries) of 20 to 30 years and they need more developed assets.”
Listed fund managers generally stuff their funds with a collection of various types of more mature assets, Ms. Ross said.
The risks of the infrastructure investments are different. Private funds have limited liquidity, “if you have to sell an asset you will take a hit,” she said.
Even less risky projects like toll roads and ports have had ups and downs. For example, U.S. toll road revenues are down 4% to 7% in the past 12 months because of higher gas prices and the recession, and many U.S. ports are suffering from the recession and a drop-off of imports from China, said Mr. Lee of KPMG.
Infrastructure is beginning to be divided into two broad types: core — which is regulated by public authorities, has a bar to entry and guaranteed revenue, such as toll roads — and non-core, which is everything else, said Mathias Burghardt, head of the infrastructure group as AXA Private Equity, Paris.
This economic crisis has redefined infrastructure for investors as investments that are long duration, generate income and protect against inflation, he said.
“Today those investments are mostly in Europe. In the future, the U.S. will be a major market."