Outlook 2015: Five themes

Increased M&A activity, an expanded role for private equity in the sector and development banks’ changing mandate are among the key themes BMI’s Michelle Karavias singles out for 2015.

Increased Consolidation and M&A Activity

“We expect 2015 to see a rise in merger and acquisition activity – with major players consolidating, offloading non-core assets and acquiring access to strategic sectors. The post-financial crisis construction sector continues to present the challenges of reduced contract opportunities, more challenging client demands and a constrained financing environment and we expect mergers will be a popular tool in order to improve economies of scale and enhance bidding positions. The acquisition trend is also likely to accelerate as companies seek to target new markets or provide the whole range of services to meet more demanding clients.

Equally, companies will continue to cut non-core assets, leading to acquisition opportunities. On the other side of the trend we see increased M&A activity as creating opportunities for regional players to continue to expand their market share in the global competitive landscape. The sale of assets to meet competition regulation for example, will be one factor providing smaller regional players the opportunity to consolidate their positions both domestically and regionally.”

Expansion of private equity role in infrastructure

“We expect the volume of capital from private equity invested into infrastructure to expand notably in 2015. At the same time, the elevated fundraising rate is expected to continue, with a wider array of investors entering the sector.

With volatility returning to the financial markets, infrastructure's appeal will only expand, especially to institutional investors. We expect the level of pension fund investment into the sector, especially in the US and the UK to expand in 2015.

Infrastructure fundraising has been expanding since 2012, with infrastructure assets under management standing at a record high as of mid-2014. The level of un-invested capital in funds is at its highest level, and we therefore expect investments into the sector to step up from 2015. We believe developed markets to continue to account for the majority of investment targets with North America and Europe particularly popular, and utilities and transport assets popular. Conversely, the trend of targeting energy and mining assets is under threat from lower commodity prices hitting asset valuations.”

China infrastructure focus going global

“We anticipate that Chinese companies will continue to expand the scope of their engagement in the global infrastructure sector in 2015. The role of Chinese engineering and construction players, in addition to sector investors, is expected to continue to evolve beyond the traditional resource model, with implications for developed and emerging markets. To offset a slowing domestic construction sector, China is making greater efforts to improve the reputation of and export its expertise and secure access to more stable assets and project opportunities in developed markets. At the same time, it is extending its engagement beyond Sub-Saharan Africa, with investment targeted in Latin America and Eastern Europe and expanding its presence in developed markets.

In particular we highlight real estate, energy and infrastructure assets and investment as high on the list for Chinese companies and investors. We expect this trend to gather pace in 2015, as governments remain cash strapped and therefore more open to Chinese investment and financial support.”

Multilaterals and development banks’ changing role

“The role of multilateral financial institutions and development banks in supporting infrastructure investment is expected to evolve in 2015. We anticipate that the role played will shift from primarily capital contributions to projects, into the provision of support on a technical and regulatory front. Increasingly regional and global development agencies are providing capital to help countries build up expertise, regulatory environments and overall lend credibility to projects – in the hope of creating a more attractive environment for private investors.

Multilateral agencies have a strong role to play in anchoring investors, lending project expertise and guarantees that enable governments to attract private capital. We expect a proliferation of programmes and platforms intended to provide this support and the execution of these programmes to increase over 2015.”

Reforms crucial to sustain infrastructure investment

“The growing need for reforms in the infrastructure sectors of emerging markets will become increasingly apparent in 2015. Growing pressure on country balance sheets, especially in the large commodity producers, is further underlining the need for private investment to develop much needed infrastructure.

In this context, reforms at the regulatory level will be crucial for countries to attract private investment. In particular, we highlight risks in financing, tendering, permitting and labour as key areas in need of reform across major emerging markets.

We believe Latin America and Sub-Saharan Africa on average are making the greatest strides in reforming to compete for infrastructure investment, whilst the BRICS countries will continue to lag behind over the near term. In 2015, we see some potential for tangible progress from China and India, but expect little change in Brazil, Russia and South Africa.”

Michelle Karavias is chief infrastructure analyst at market research firm BMI.