Last year may have been set a high water mark for infrastructure fundraising, yet it ended on a lesser note for deal activity, new research shows.
Allen & Overy’s M&A Index, which looks at global transactions worth more than $100 million, found that the total value of deals completed in the last quarter of 2013 was 39 percent lower than in Q4 2012. A similar picture emerged when focusing on transaction volume, which decreased by 38 percent.
That made the three months to the end of December 2013 the quietest quarter since Q1 2012.
“There have been fewer big brownfield transactions than we would perhaps have been expecting. It’s been a slower quarter, but in line with the M&A market generally,” Richard Evans, an infrastructure partner at law firm Allen & Overy, told Infrastructure Investor.
The chief reason for the deceleration was rather straightforward, the study suggested: there was too much capital chasing too few assets.
On the supply side, a pause in the recent spate of big airport deals and a five-year regulatory price review in the UK water sector were among the factors explaining a smaller number of large assets coming to market.
But the greatest challenge lay on the demand side of the equation, where the rise of direct investing by large pensions and sovereign wealth funds and the general increase of investors’ allocations towards infrastructure meant that much more money was now hunting for deals.
Figures recently released by Infrastructure Investor Research and Analytics show that unlisted infrastructure funds raised more capital last year than in any year since the beginning of the financial crisis, with $32.6 billion pooled in 2013 by vehicles focused on the asset class.
“There seems to be a lot of capacity in terms of funds available for infrastructure investments, whether for debt or equity,” Evans said. “That is raising a question mark over whether some of the assets that are being chased are being chased too keenly and therefore there is a perception that there are no more bargains to be had.”
One area of interesting activity was Scandinavia, the study noted, with Fortum selling its Finnish electricity grid for €2.55 billion to a consortium led by Borealis and First State. Evans pointed out that the deal is being trailed as the first of three sizeable transactions, as the Finnish utility is now looking to sell its Norwegian and Swedish units.
The long run would also see airport sales coming back into play – with Aberdeen, Glasgow and Southampton soon to come on the block – and much further forward, some fresh opportunities will be opened up by the UK’s £375 billion (€451 billion; $617 billion) revamped National Infrastructure Plan.
Yet Evans did not expect the supply demand conundrum to be solved over the coming quarters.
“We’re certainly not talking about a bubble. But there is a perception that the market is getting crowded.”