2012: What can we expect? (Part 4)

We asked leading professionals in the infrastructure asset class for their thoughts on what next year has in store. Today’s opinions come from Luis Manuel Sada-Beltrán, Mathias Burghardt and Tom Murley.

Luis Manuel Sada-Beltrán, associate, Sanchez-DeVanny  

Luis Manuel
Sada-Beltrán

Mexico’s biggest promise for 2012 will undoubtedly be the development of public-private partnerships (PPPs). Even though regulation has yet to be enacted to the recently passed law on PPPs (ratified by the Mexican Senate on December 14), we will begin to look at a more benevolent market for the development of these kind of projects as well as an increase in the financial products to be offered that have a direct link with infrastructure (e.g. capital development certificates). 

Foreign and national investors have been waiting for a clear legal framework on PPPs, and now the table is set for them to boost the infrastructure that our country needs, a sector that has seen little activity in the past years. 

Given Mexico’s current institutional maturity, stable economy and will to grow at a faster speed, we do not expect obstacles for the upcoming opportunities in the infrastructure market.

Mathias Burghardt, Head of Infrastructure, AXA Private Equity

Mathias
Burghardt

On the fundraising side, infrastructure should continue to be an attractive offering for investors looking for de-correlation to the economic cycle and real return.

A severe lack of bank debt will continue to be an issue for infrastructure investors in 2012, both in terms of financing for new deals and for refinancing of existing investments. However, this should be mitigated by the increasing appetite for infrastructure debt products amongst pension funds and insurance companies. 

In terms of deal flow in Europe, the high number of regulated assets such as gas and electricity grids being put up for sale will continue. But we will also start to see a rise in the number of airport assets coming to market – both through government and corporate asset sales.

The dismal macro economic climate will not necessarily impact negatively on regulated assets, as their tariffs will increase based on 2011 inflation rates which were relatively high.  This will not be the case for airports, toll roads and ports, as the benefit on tariffs is likely to be offset by disappointing traffic growth.

Tom Murley, director, team leader, HgCapital Renewable Power Partners

Tom Murley

Recently some have noted the passing of the golden age of renewables, which they say peaked in 2007 with IPOs and big M&A deals. Recent activity suggests otherwise. In 2011 in Europe, dedicated renewable and general infrastructure funds and direct pension investors invested over €3.5 billion in equity in EU renewable energy projects – a fund investment record and vastly exceeding the €800 million average annual investment by them from 2008 through 2010.

The growth was driven by four factors: utility capital constraints; more realistic asset valuations after the 2007-08 cleantech bubble; larger projects and secondary portfolios offering the scale needed by large infrastructure funds; and declining PFI and PPP deals which were the foundation of many EU infrastructure funds, leading investors to seek alternatives. 
 
Despite this growth, 2012 will be a difficult year for renewables (for scarcity of project debt if nothing else) and the start of a long and sometimes difficult transition to real maturity of the industry. Green policies and subsidies drove past growth. They remain drivers, but other concerns are coming into play – consumer burden chief among them.

Energy costs are rising with higher fossil fuel prices and capital expenditure to renew ageing power infrastructure. Policymakers worry about energy cost impact on consumers. Investors should expect more policy changes and policy as a cost reduction driver – such as scheduled tariff reductions. Renewables will need to demonstrate long-term value to consumers, which they can do, and the industry must make a stronger case for economic contribution through job creation, investment and taxes.  

There will be consolidation, particularly among equipment suppliers and developers, where scale and efficiency can reduce costs. Successful investors will keep close to policy, technology and equipment suppliers (target or buyer) while seeking the most productive assets and actively managing them to reduce costs and increase efficiency.