The infrastructure space may be getting crowded, with 63 funds thought coming to market in the next 12 months. But so far it seems like no one is complaining about getting crowded out.
By the government, that is.
Last week, China became the latest country to announce a massive economic stimulus bill, some $586 billion, much of it slated to go toward building airports, highways and railroads. The government of Australia previously unveiled plans to fast-track its proposed A$20 billion (€10 billion; $13 billion) Building Australia fund. Similar moves are currently being debated in the US, where state transportation officials are keeping their fingers crossed for Congress to give them $20 billion for “ready to go” infrastructure projects. And in the UK, a debate in the media on the same subject seems poised to spillover to the assembly at Whitehall.
Bad news for private equity firms hoping to invest in the sector? Hardly.
“I’m happy by it, to be honest,” says Martin Lennon, head of UK-based Infracapital Partners, which earlier this week held its final close on £910 million. “The sorts of amounts [the governments] talk about putting in seem like big numbers but in the global scheme of things it is nowhere near enough to meet the requirements to invest in new infrastructure and also to maintain and develop existing infrastructure.”
Similar sentiments are being expressed in Australia. “As a citizen, I am happy – I think there’s been underinvestment in infrastructure in this country,” said one investor in Melbourne, for whom the sorts of projects the government is thinking about financing from its Building Australia fund would not be “good use of our risk capital”.
And in the US, the mere talk of giving cash-strapped states the money they need to finance nearly $20 billion of unfunded but “ready to go” projects has some GPs giddy with excitement.
“Oh, I’m happy – believe me, we’ve been excited since we started hearing the rumblings,” says Russ Greenberg, managing partner at middle market private equity firm Altus Capital Partners in Connecticut.
What’s with all this excitement?
For one, as Lennon points out, the billions being doled out seem like a lot, but in reality it’s a drop in the bucket compared to the actual spending needed globally. Take the US as an example: $20 billion worth of projects financed by federal dollars pales in comparison with the $1.6 trillion that the American Society of Civil Engineers predicted would be needed through 2010 just to maintain existing infrastructure.
That estimate was from 2005. Today, the gap not only remains but is also getting bigger. Small wonder, then, that private investors don’t feel threatened by increased government spending: there’s plenty of room for both public and private capital.
Secondly, much of that infrastructure spending is off-limits to private investors anyway. In the US, the American Association of Highway Transportation Officials’ (AASHTO) growing list of 3,109 “ready to go” infrastructure projects doesn’t really fall within the realm of private investment.
“Typically, we don’t privatise our infrastructure – none of the states that spoke to AASHTO would,” says Kris Kolluri, commissioner of transportation for the state of New Jersey.
Thirdly, just because the infrastructure won’t be privatised doesn’t mean that private capital can’t benefit from the stimulus. As Kolluri rightly points out, the companies that will most immediately feel the impact of the stimulus will be the service contractors asked to fix up the bridges, toll roads and other public infrastructure assets. To the extent that private equity backs those companies, it stands to cash in big.
Case in point: Greenberg’s Altus Capital recently bought DS Brown – a manufacturer of specialty components for bridges, highways and airfield pavement structures. If Kolluri gets the money the state is asking for, one of his first priorities will be fixing up the state’s structurally deficient Manahawkin Bay Bridge. It seems like a match made in heaven.
Small wonder, then, that private investors are all smiles about increased government spending on infrastructure.