As an investor, however capital-constrained you might be right now, part of your job is to spend time thinking about all those great things you could be doing in the markets at the moment – if only you had more money to invest. Indeed, many investors are thinking these thoughts. This is why, amidst the world struggling to get to grips with the worst recession in living memory, there is all this talk about fabulous investment opportunities beckoning everywhere.
But as ever, talk is cheap. Identifying where return-hungry capital should go right now is the relatively easy part; much harder to make sure that the money needed to turn investment ideas into reality is actually there and ready to be put on the table.
Just ask Citi, Vancouver Airport Services and John Hancock Life Insurance Company, whose failed effort to finance their $2.5 billion purchase of Chicago’s Midway Airport in April continues to be a big talking point in infrastructure circles. We wrote about the deal’s collapse in our last edition, but here we return to the subject, because the ramifications are not yet understood. On page 20 of this issue, Infrastructure Investor’s Cezary Podkul begins his account of why the market thinks this potential landmark deal didn’t work out: is the credit crunch solely to blame? Or did the sponsors get it wrong? The infrastructure investment community appears divided on the issue, and there is much debate going on about what happened and why.
Meanwhile the City of Chicago – which definitely could have used the money – is left pondering whether to have another go at selling the airport. Few believe it will try again soon, and some think the opportunity may be lost forever. Which prompts an important question: what does the Midway fiasco say about the prospects for other large-scale infrastructure privatisations in the US? Will they have to be struck from the list of feasible investment opportunities also?
If they are, US-focused investors that do have capital to invest might have to look for suitable targets elsewhere. Take CalPERS for instance, whose fledgling infrastructure platform we profile on page 24. The Sacramentans are seeking to participate in infrastructure projects not just in their home state of California, but in other parts of the US, too. However, investing in American infrastructure will not be straightforward, not with financial markets in such dire straits and parts of the political establishment still deeply sceptical of PPP. With all this in mind, even though the country’s need for infrastructure funding is enormous and should in theory be absorbing huge amounts of institutional capital, CalPERS and other US institutions might as well start thinking about their plans in the asset class as global projects.
In doing so, they could be taking a leaf out of the International Finance Corporation’s book, for instance. The World Bank affiliate has just organised a $10 billion “crisis facility” to help make sure vital infrastructure initiatives in the developing world can move forward despite the economic crisis. Given the IFC’s global mandate, $10 billion may not seem much; but is a start, and where the institution leads, private sector co-investors may feel encouraged to follow.
Sheahan worries that investors’ newfound risk aversion will reduce capital flows into the emerging markets to such a low level that economic development will stall. This the world economy can ill afford he argues, because if the economies of China, India and their peers don’t revitalise global demand, nothing else will.
To keep emerging markets going, among the many things needed is new infrastructure. Institutions such as IFC cannot finance it on their own – they won’t even get close. But Sheahan insists they should be able to make some very useful progress in paving the way for others.
This isn’t incorrigible optimism – it is positive, forward-looking thinking that refuses to be intimated by the enormity of the task before it. The world cannot have enough of it – especially not now that an economic crisis is raging with historic intensity.