Bubble trouble

When does asset price inflation turn into a bubble?

It was one of the major themes of our Berlin Summit 2013, although it didn’t quite have the headline-stealing thunder and general consensus gathered by the asset class’s current bête noire, political risk. 

Still, throughout the corridors of Berlin’s Radisson Blu hotel you could hear the question being asked: Is infrastructure experiencing a new asset bubble? 

Well, the first thing worth bearing in mind when trying to answer that question is that infrastructure might – depending on your returns profile – already be experiencing some bubble economics, particularly when it comes to European core infrastructure. 

Global Infrastructure Partners’ (GIP) helmsman Abebayo Ogunlesi admitted as much during the opening keynote interview, when he remarked that “prices in Europe are 50 percent higher in some cases than what we wanted to pay,” although he also argued that the “current bubble is not as bad as the 2006/2007 asset price bubble”. 

You don’t have to be a genius to understand that Ogunlesi is still chewing on the difference between the €2 billion offered by GIP and Flughafen Zurich and the €3.08 billion paid by winning bidder Vinci to acquire Portugal’s airports operator, ANA. 

That price was apparently a bit too steep, in GIP’s opinion, and a similar case can be made for asset prices across other core infrastructure sectors, like water. Swiss private markets firm Partners Group coined the term ‘asset price inflation’ to highlight how returns are getting depressed across the core infrastructure space. 

The difference between inflated and bubble prices, though, may be very much in the eye of the beholder. 

If you’re aiming for returns in the high teens but competing against someone who’s happy to get mid-to-high single digit returns, then you might feel yourself bidding in the midst of a bubble. If, on the other hand, you are perfectly content with mid-to-high single digit returns, then all this bubble talk might sound a bit odd. 

Still, there are some worrying signs out there, whether or not you think a new bubble is forming or, like Ogunlesi, you already believe the bubble is here (but not as bad as it could be). 

A classic sign is that there is a huge amount of money descending on the asset class, which may lead to some costly misunderstandings. 

For example, arguing that an infrastructure equity investment is in any way similar to buying a sovereign bond is counterproductive at best and disingenuous at worst. 

That notion has partly been predicated on the back of another worrying concept, which is now thankfully being shattered: that regulated assets offered iron-clad safety and predictability, allowing investors to plunge into the asset class without much concern.

Still, perhaps the best expression of the desire to bring infrastructure into gilt-like territory is the more or less wilful disregard for the fact that investors are buying into businesses rather than passive assets. These are businesses with employees, trade unions, government counterparties, all of which have to be managed before investors cash their cheques. 

Nor does infrastructure debt substantially change the above. Without active management, all but the plainest of PFI and/or availability-backed PPP debt fits the gilt-plus story. Project finance debt may have low default rates and high recovery rates when it does default, but that is because banks employ considerable resource in structuring and monitoring it. 

If the current surge of interest in infrastructure prompts new investors to throw caution to the wind, then the asset class can really be said to be in bubble trouble.