‘Pricing pressure on core infra’

In markets perceived to be ‘safe’, core brownfield infrastructure assets are experiencing ‘upward pressure’ on pricing according to a new report from private markets specialist Partners Group. The firm says achieving an adequate risk-return balance is ‘increasingly challenging’.

Brownfield infrastructure projects in the ‘safe’ developed world are sought after due to stable cash flow streams and inflation protection. As a result, “valuations for core infrastructure assets in these regions” are “experiencing upward pressure”, according to the latest H2 2012 Navigator report from Swiss private markets specialist Partners Group.

The firm says that the “rush for core assets in core markets” has resulted in long-term levered equity internal rates of return (IRRs) in the range of 8 to 10 percent. It says: “While these returns continue to offer a reasonable premium over record low government bond yields, they have clearly contracted, particularly in the large cap space, where large premiums to regulated asset base (RAB) expose equity valuations heavily to changes in regulatory returns.”

The report points to the €3.2 billion purchase in May of Open Grid Europe – comprising 12,000km of gas pipelines in Germany – by Macquarie Infrastructure and Real Assets and a number of institutional investors. It says: “We estimate [the purchase] was significantly above German energy producer E.ON’s reserve price and should translate into a high single digit base case return expectation”.

It also says that “premiums to the RAB that are paid for UK water assets are back to high pre-crisis levels”. It says the £1.24 billion (€1.55 billion; $1.92 billion) acquisition of a 90 percent stake in Veolia Water UK’s three regulated water businesses by Morgan Stanley Infrastructure and Infracapital in June was “priced at a premium to RAB of approximately 30 percent”.

Partners Group says it has a “neutral outlook” for brownfield assets in highly regulated infrastructure sectors and believes “it will be increasingly challenging for infrastructure investors to access opportunities with an adequate risk-return balance”.

The firm goes onto say that it sees  opportunity in capturing construction risk premiums in areas such as renewable energy and in the social infrastructure/public-private partnership sector – especially in Australia. It also favours the US power sector “on a selective basis” and a “range of emerging market opportunities”.