Interest in US infra has cooled, says placement agent

CP Eaton Partners says LPs are adopting a “wait and see” attitude towards infrastructure investments in the US. The placement agent cites political and financial obstacles as the chief reason for this and thinks the energy sector has the most potential for upside.

Placement agent CP Eaton Partners says in a report that interest in infrastructure investment in the US has cooled in 2009 and is likely to remain subdued this year.

According to the firm, investors are waiting to see if deal flow in the US ever reaches the volume predicted before making any commitments.

The chief obstacles to privatisation in the US have been both political and financial and these obstacles continued to prevail in 2009 despite states facing huge financial problems, CP Eaton says. In addition, over half of the $90 billion raised for infrastructure over the last five years has yet to be deployed. As such, the placement agent suggests the relatively low amount of $6 billion raised in 2009 for infrastructure funds is proof that LPs have adopted a “wait and see” attitude towards the asset class.

The bright spot is energy and power infrastructure, with the firm expecting LPs to continue “to mount exposure to these sectors” while they wait for investments in transport infrastructure to take off.

India and Southeast Asia have a huge need for infrastructure investments, but CP Eaton thinks LPs are not being offered the right opportunities. This is because the private sector has found it hard to balance risk with return, which leaves government-sponsored initiatives dominating investments in infrastructure.

Real estate deal volume in the US was down significantly last year compared to the peak years of 2006 and 2007. The placement agent expects to see both fund managers and investors continue to focus on troubled legacy assets this year, with property values expected to bottom out by mid-2010. European LPs pushed their 2009 allocations into 2010 which, combined with the continued stabilisation of property markets, should raise LP interest in European opportunities.

The UK, where property prices are said to have bottomed out last summer, is attracting more LP interest with indications of levelling valuations and a turnaround in the commercial real estate market, CP Eaton says. Asia, on the on the other hand, proved resilient to the crisis with China being the star performer. Asia was home to seven of the world’s 10 most active real estate markets, and is seen as the most attractive proposition for this year.

US private equity is expected to adopt a “back to basics” approach now that LPs and GPs have got more comfortable with the associated risks of leverage-generated returns. That means 2010 is looking brighter, the placement agent argues.

In Europe, private equity will continue to gravitate away from large cap and highly leveraged transactions with most opportunities targeting lower- and mid-market buyouts, growth equity and sector- and country-focused funds. European LPs are also showing a growing interest in distressed investments, secondary interests and direct purchases of funds on the secondary market.

Asia, perhaps predictably, fared better last year than the US and Europe, mirroring its better overall performance in the wake of the global downturn. China, India and Japan offer significant opportunities which managers plan to capitalise on following the establishment of country-specific funds. Funds of funds are also attractive propositions for LPs hoping to access multiple geographies.  Expect Asia to continue being an attractive proposition this year. “Growth capital for growth companies in growth markets,” is this year’s mantra, CP Eaton concludes.