Investing in infrastructure projects is about to become much more of a mainstream activity. After mixed results from early forays into the nascent infrastructure asset class, investors are increasingly drawn to the potential steady, long-term returns that can be realized through these types of investments.
There are challenges: many are still struggling with how to analyze investments with extended time horizons, particularly after some players were burned by pre-crash overleveraging.
But the big picture is that government retrenchment in the U.S. and Europe is forcing a rethinking in how to pay for maintaining and improving essential transportation networks as well as water, power, and communications facilities. More private sector investment appears essential, but public-private partnership structures have been slow to catch on in the U.S., frustrating private capital sources and operators. Many of the nation’s road and water systems, meanwhile, are approaching the end of their lifecycles, and population gains are putting additional stress on aging systems.
The debt- ridden U.S. federal government is allocating less to state and local governments, which are hard pressed to increase taxes or user fees on constituents to pay for necessary infrastructure improvements. Something has to give.
In examining this issue, I met and interviewed several prominent investment industry leaders. One overall conclusion is that over the next decade, infrastructure will become a widely accepted asset class and a vehicle to deliver steady returns while meeting a public need. Investors benefit from long-term contracts (offering an inflation hedge) with partners that have strong credit.
And there is growing need: governments around the world, particularly in the U.S., will require greater private capital infusions to construct and operate systems which meet rapidly changing 21st century demands.