More PPPs, please

Palladio Partners, the German real assets adviser, found evidence of unrequited love when it conducted a recent survey into how German institutional investors view the infrastructure asset class.

The investors, representing 70 percent of German institutional capital, expressed a liking for infrastructure strategies across the board but were particularly drawn to public-private partnerships (PPPs). But only 13 percent of those surveyed had actually invested in PPPs, with renewable energy and electricity grids having received far greater quantities of institutional capital.

According to Bernd Kreuter, managing partner at Palladio, there was a lot of interest in PPPs in Germany prior to the Global Financial Crisis, with some deals being done between 2004 and 2006 in the road sector in particular. However, in the aftermath of the Crisis, public investment was ramped up – crowding out the private sector in the process – and anti-privatisation sentiment spread amid outrage at bankers and general suspicion of the financial sector.

PPPs, toward the lower end of the infrastructure risk/return spectrum, would fit well with German institutions’ apparently modest return ambitions. The survey found they were far more interested in matching their liabilities and achieving long-term stable cash flows than in maximising returns. On average, they expected returns to be around 6 to 7 percent.

The survey also highlighted another frustrated ambition. A high percentage of those canvassed said they would like to respond to a national discussion about German institutions supporting the German economy by backing local infrastructure initiatives. However, only 7 percent said they had been approached by the public sector with a view to undertaking initiatives within their local municipalities.

While regulatory worries are not uncommon among infrastructure investors globally, the issue of regulation is of almost universal concern in Germany – with no less than 97 percent of respondents citing regulation as an issue that matters to them. This was mainly with respect to regulation at the asset level, as only 43 percent said regulation of the institutions themselves – such as through Solvency 2 – was a matter of concern.