The shift from primary to secondary

WITH THE EMERGENCE of a Conservative/Liberal Democrat coalition government in the UK in May last year came a new scepticism towards the Private Finance Inititiative (PFI), the UK’s standard method of procurement for public-private partnerships.

Combined with the effects of the global financial and economic crisis, this has resulted in a marked slowdown in new PFI projects emerging through the pipeline in recent years. According to the National Audit Office, between £4 billion (€4.7 billion; $6.4 billion) and £5 billion of PFI projects were signed off per year between 2000 and 2008. Since 2008, only between £1 billion and £2 billion of projects per year have been given the green light.

This is not all bad news, however. What it has done is force buyers to scrutinise the secondary market for deals. This has proved a happy experience for many since plenty of secondary assets are currently up for sale. It could also help the infrastructure asset class to attain a new level of maturity given that the secondary market specifically, and the level of liquidity more generally, currently lag behind other asset classes.

“There are, and will continue to be, more sales by those who are not natural long-term holders of equity, for example contractors for whom equity is not the primary driver of their business model,”
says Anthony Brown, managing director of investment & asset management in the London office of Australian developer Lend Lease. “Also, there were private equity-type funds launched seven to ten years ago and investors want to crystalise the return of equity as these funds reach the
end of their life. So there will be buying opportunities as stock is released onto the market.”

Brown adds that institutional money is increasingly looking for a way into infrastructure and that “over the next three to five years, the shareholders of infrastructure assets will typically be institutions rather than contractors or project sponsors”.

He adds that instititutions are examining infrastructure closely in the current climate given that listed funds are typically trading at a premium to net asset value. This places them in a favourable light compared with listed real estate funds, for example, which are typically trading at discounts.

Brown estimates that the real estate market is some years ahead of infrastructure in terms of liquidity, range of investible vehicles and the trading of secondary interests but that this gap is likely to close as institutional investment allocations increase towards the infrastructure space.