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How big is the universe?

CVC Capital Partners is the latest firm to offer an infrastructure product. Nicholas Lockley looks at the scope of the opportunity.

Measuring the size of the infrastructure market is a dark art. The sector is jammed with endless arrangements between the public and private sectors – ranging from a simple contract for the procurement of a good or service to the more sophisticated PFI-style of contracts.

With private equity taking a more prominent role in this sector in the last few years and with assets being sold as infrastructure plays, measures of the size of the market vary widely.

Take, for example, S&P. According to a recent report published in mid-November the global infrastructure market in 2007 had already reached $322 billion, well on target to match 2006 when the market was measured at $342 billion.

In the absence of more authoritative data, taking the project finance market as a proxy for measuring the size of the commercially financed infrastructure market is a good option. Here, data providers Thomson Financial and Dealogic say that the market value in 2006 had an enterprise value of $220 billion.

Figures for the first six months of 2007 show that infrastructure project finance remains popular with investors: hitting an enterprise value of $106.4 billion according to Thomson and Dealogic respectively.

Ryan Orr from Stanford University’s Collaboratory for Research on Global Projects estimates in the past 18 months more than $160 billion has been earmarked for direct infrastructure investments.

The asset class’s long-term capital requirements and stable cashflows make it an ideal candidate for private equity treatment both from investors’ and managers’ perspectives. There are a number of funds that have backed infrastructure businesses from within traditional private equity funds: witness Guy Hands’ Terra Firma deals in waste-processing and water.

But increasingly global managers are seeing the benefits of addressing such a large market directly with a dedicated fund. Carlyle and today CVC Capital Partners are the most recent converts. CVC said it has hired an infrastructure veteran to spearhead its $2 billion programme.

Investors are hungry for alternative assets. Infrastructure provides a whole new destination for capital. And the stability of infrastructure assets is well appreciated by shell-shocked banks looking to hit lending targets.

Infrastructure marks a more defensive frame of mind as global markets stutter. It is of course not risk free and there may be some complexity in matching the traditional limited partnership to the longer time frames of projects often measured in decades. But as risk-adjusted returns go, it is attractive alternative to mainstream private equity and like the universe it is still expanding.

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