PE firms to outshine banks in infra investing

Banks will take an increasingly back-seat role in infrastructure investment as their role gradually evolves from being agents rather than owners of assets, S&P says.

With the “new normal” being more restrictive bank regulation in the US and Europe, banks will serve more as agents rather than principal investors in infrastructure assets, according to a report released by Standard & Poor's (S&P) last week.

The rating agency also expects private equity firms to expand further into the space since they have more flexibility to invest their capital higher up on the risk spectrum.

The significant estimated amount of capital that will be needed for infrastructure over the next few decades, and the public sector’s inability to fund those needs, “creates private sector opportunities [with a] risk-reward [profile that] favours private equity firms over other financial institutions that may serve as lenders or in other roles,” analysts said in the report.

“Major global banks may raise infrastructure funds, but in terms of putting more of their own capital into those funds, we will be seeing less of that,” Ken Leon, one of the report’s authors, commented during an interview with Infrastructure Investor.

JPMorgan, Morgan Stanley, Goldman Sachs and UBS were among the financial institutions cited by S&P as examples of major global banks reducing their principal investments.

Morgan Stanley and Goldman Sachs declined to comment while JP Morgan and UBS did not respond to requests for comment before press time.

“We believe de-risking strategies perhaps related to regulation are in place at JPMorgan Asset Management ($2.3 billion),” the report stated. Referring to Infrastructure Investor’s II30 ranking, whose sole metric is the amount of capital raised over the last five years for direct infrastructure investments, S&P remarked that the institution had fallen to 22nd place in 2014 from 14th in 2013.

The agency believes that other global investment banks, such as Morgan Stanley and UBS, are reducing the profile of their private equity activities dedicated to infrastructure investment.

“I think Morgan Stanley’s strategy is really set towards being an agent and not a principal investor,” Leon, who covers the investment bank, said.

“All these major banks service ultra-high net worth clients, helping them diversify their investments and portfolios, which may include infrastructure as part of the alternatives asset class but the role that these large banks will have to play is going to be more as an agent rather than an owner.”