2012: What can we expect? (Part 3)

We asked leading professionals in the infrastructure asset class for their thoughts on what next year has in store. Today’s opinions come from John Schmidt (pictured), Michael Cook, Renaud de Matharel and Rob Gregor.

John Schmidt, partner, Mayer Brown

John Schmidt

“From California to the New York island” goes the refrain of the old Woody Guthrie song “This Land is My Land” and that seems to fit US PPP activity as we enter 2012. 

In California the state’s first transportation PPP project, the rebuilding of the Presidio Parkway in San Francisco under an availability payment structure, has survived a last-ditch legal challenge and is now scheduled for closing early in 2012. On the other coast, the State of New York is about to shortlist bidders for its first PPP project, the rebuilding of the Tappan Zee Bridge across the Hudson River; and the Port Authority of New York and New Jersey is moving into high gear on its first PPP venture, the rebuilding of the Goethals Bridge on Staten Island. 

The Guthrie lyrics move on “to the Gulfstream waters” and that takes us to Puerto Rico where the proposed privatisation of the Luis Munoz Marin Airport in San Juan is moving toward bidding in the first quarter of 2012. All signs point to that transaction as the take-off for US airport privatisation that came close to occurring two years ago with the privatisation of Chicago’s Midway Airport until the financial markets intervened and the transaction did not close.  

On the other side of the Gulf, the state of Texas, an early PPP pioneer that had a brief legislative moratorium, has again come out swinging with steps like a recent request for qualifications from teams interested in building, operating and possibly financing the Grand Parkway, a huge new beltway around Houston.

There has also been a wholesale movement at the national legislative and regulatory level to support PPP approaches. The rearguard opposition from a few 'anti-privatisation' legislators, mostly Democrats in the House, has disappeared. Instead Democrats and Republicans, in Congress and in the Administration, compete in declarations of support for innovative privatisation approaches to reduce costs and provide the funding needed for US infrastructure. 

To quote another song lyric: 2012 should be “a very good year!”

Michael Cook, senior managing director, Macquarie Group 

Michael Cook

I foresee a year for the industry that builds on many of the strengths of last year – and that is great news for infrastructure sponsors and investors. From a deal flow perspective, we are seeing a large number of attractive assets available, which is in part a result of governments’ need to leverage their spending in the face of ongoing global financial headwinds.

Further, vendors and buyers in the infrastructure transaction space have gained confidence in their ability to complete deals. This broader pipeline of transaction targets has had the positive effect of leading to stability in valuations. 

Given the current high level of global volatility and uncertainty, we have also seen many new investors add an allocation to infrastructure in order to diversify their portfolio. This means that there is capital available that will enable us to take advantage of some remarkable transactions.

We believe that the industry is seeing this investment influx because investors saw that, even in the face of the most significant financial disruption of our generation, this asset class was able to deliver on its promises of strong risk-adjusted returns, regular distribution income, reduced volatility and reduced correlation.

Renaud de Matharel, chief executive, Cube Infrastructure

Renaud de
Matharel

As discussed at Infrastructure Investor's recent European roundtable, we are all desperate to see the Euro crisis come to an end, hoping that we will not experience a sharp dive and end up in the doldrums next year. At the same time, we are enjoying what has clearly become a buyer’s market and are all hoping to buy assets at lower prices next year.

So, the real questions for 2012 at the end of the day are: What is a low price? Can infrastructure asset prices go seriously down? Can we raise more funds from investors to accelerate Cube’s portfolio build-up and take advantage of this attractive market? What should we do in terms of investment strategy to do that?

Other themes for 2012 will include closely evaluating and monitoring the effects of new fund management regulations; e.g. Dodd Franck and AIFMD; as well as the effects of new tax regulations; e.g. FATCA in the US and budget deficit financing laws which are passed in several European countries as governments anticipate the economy to go into recession in 2012 and deepen the deficits across the continent.

A final touch of optimism for next year: we all hope the Germans will end up understanding that their economy will also go into recession if the Eurozone goes into a prolonged one and that the only way out for all is to let the European Central Bank and the International Monetary Fund provide the European banks with the refinancing lines they need so that they are able, in turn, to restart financing the economy. As has always been observed for more than a century of economic history, economic growth and capital markets recovery cannot happen without the banks.

Rob Gregor, managing director, Balfour Beatty Infrastructure Partners  

Rob Gregor

The key theme for 2012 will be a flight to quality, altering expected returns across developed infrastructure markets. 

Ever since the financial crisis took hold in 2008, there has been greater emphasis from the investing community on the developed infrastructure markets of Western Europe, the US, Canada and Australia, with developing markets such as Asia expected to provide private equity-style returns for infrastructure assets. With the onset of the problems encountered in the Eurozone in H2 2011, a further investor risk aversion is taking place among the developed markets of Western Europe. 

Crudely speaking, investor interest is shifting to Northern Europe (UK, Germany, Nordics and Benelux) and away from Southern Europe (principally Spain and Italy). At the same time, there is an increased supply of infrastructure opportunities in Spain and Italy resulting from this crisis; whether due to contractors and other infrastructure owners deleveraging or selling non-core assets, or fiscal pressures leading to federal and municipal government sell-offs. 

This changing demand/supply equation will lead to a growing divergence in the expected returns of infrastructure assets in Northern versus Southern Europe. The long bidding list lining up for Edinburgh Airport provides some further evidence of this. However, there are some high-quality assets and sectors in Spain and Italy (e.g. their regulated utility sectors are some of the most advanced in the world), and significant return premiums can be expected for those investors willing to accept a relatively less certain sovereign/currency outlook.