“We are in a period of asset price inflation where the excess liquidity injected by central banks has driven up asset prices and will continue to do so; it began in the bond markets, followed by core real estate and core infrastructure,” Swiss private markets specialist Partners Group warned in a recent report.
At first glance, Partners’ warning seems like bad news for infrastructure investors. After all, if prices for core infrastructure are currently inflated, then buying discipline becomes critical. Buy too aggressively, or over-leverage your asset, and you may be in for a bumpy ride in the long term.
But of course, this scenario is only potentially problematic if you are on the buy-side. If, on the other hand, you are a seller, asset price inflation can be a very good thing indeed. Just ask Abertis, Alinda and Hochtief, which are all said to be in the early stages of divesting precisely the type of core infrastructure assets that Partners would describe as ‘inflated’.
Abertis and Hochtief are gearing up to sell their airport divisions, whereas Alinda is looking to sell UK water company South Staffordshire Water.
Both sectors are experiencing something of a renaissance. The two most recent deals in the airports sector – the sale of Portugal’s airports and London’s Stansted Airport – netted the sellers around 16x the assets’ earnings before interest, tax, depreciation and amortisation (EBITDA).
Among water businesses, sales premiums have been substantial. The most recent transaction in the sector saw an iCON Infrastructure-led consortium exit the UK’s Sutton and East Surrey Water company for an equity cheque of £164.5 million (€191.9 million; $259.5 million) – reportedly generating a two times return for the sellers.
On average, sales in the UK water sector have been netting sellers a 30 percent premium to the assets’ regulated asset base.
For some of the above-mentioned sellers, this might be the best chance to sell in some time. Take Hochtief. This will be the third time the company has tried to sell its airports division. Its first two attempts – a planned initial public offering and a direct sale – both failed as market conditions were not favouring Hochtief’s €1.6 billion asking price.
Now, given recent multiples in the sector, Hochtief might have a better chance of getting what it wants, even if potential buyers will still have to paper over some of the idiosyncrasies of its airports portfolio, which consists entirely of minority stakes (albeit some significant ones), shared ownership with national governments, and some problematic hubs, like Budapest Airport.
For Alinda, this is also not a bad time to be selling South Staffordshire. The next round of price review negotiations with Ofwat are about to start in earnest and the water sector has just scored an important early victory, getting the watchdog to back down on some of its more controversial proposals. There is now a small window, in between price reviews, for investors to exit these assets.
Plus, there is some evidence that the peak of UK water returns is in the past. At the close of last year, financial services firm PriceWaterhouseCoopers pointed out that the 20 percent returns yielded in the mid-2000s are unlikely to make a comeback. These days, investors can expect returns more in the range of 10 percent to 12 percent – perhaps even less, if you factor in Partners’ asset price inflation effect.
Lower returns, coupled perhaps with a tighter regulatory regime, might make this type of asset more suited to institutional investors with a lower cost of capital. The interest from that constituency is certainly there. And so is the willingness to pay a premium, especially among foreign investors wanting to gain a foothold in the UK market.