This year we saw a competitive infrastructure market continue to attract more capital than it may muster the will to absorb. As a result some investors have begun to note similarities between some of the highly leveraged deals of today's infrastructure investment space and those transactions that are credited with sparking the financial crisis.
Australian pension fund investment manager IFM Investors, for example, agreed to pay a multiple of roughly 32 times EBITDA and attracted more than 70 limited partners to participate in the Indiana Toll Road transaction. A mid-30s multiple didn't stop a trio of Canadian pensioners (OMERS, OTPP, and CDPQ) from sweeping up Chicago Skyway either (though IFM shied away from that deal).
In these transactions, the high demand for brownfield toll road assets amoung long-term investors was compounded by their willingness to augment their firepower by entering into highly leveraged financial agreements. Detractors aren't convinced that the investors will meet their return targets – this is especially true of the Skyway transaction, which some say lacks a number of characteristics traditionally associated with a successful toll road operation (commercial transportation sector customers, for one).
A North American investment manager told us in November that one of the things currently keeping investors up at night is the intense competition in the infrastructure space.
“We're back in 2007 where something could go wrong with the debt markets,” the manager said. “You tend to see assets where there's a guaranteed return for 10 years and then an opportunity to make a really bad assumption at the end of 10 years. As a manager it's a great thing to do: there'll be no hassle for you and then your replacement will get fired.”
One pension manager present at the time agreed with this assessment, and after recounting his own vivid memory of the onset of the financial crisis, confessed that the generalised preconception that infrastructure deals are necessarily safe is perhaps one of the most dangerous aspects of the market at the moment.
“What scares me the most is getting a call from the CIO said, 'I thought infrastructure was meant to be stable and safe,' because what we seem to see, not all the time, but a lot of the time is a pushing of the envelope of infrastructure. Whether it's in terms of maybe leveraging up a little bit or it's something that we can't classify as either value-added or core.”
Another limited partner, speaking from the Australasian perspective, recently wondered whether lasting easy monetary conditions were not making buyers of infrastructure assets too complacent. With volatility on the rise across global debt markets, the investor said, it may be time to start battening down the hatches and preparing portfolios for the next cycle.