Back with a vengeance

There are many ways you can split the world in two. While geopolitics enthusiasts favour the East/West divide, trade economists like the North/South categorisation. Financiers, meanwhile, tend to view the globe in terms of developed and emerging markets. These denominations, of course, don't always overlap; neither are they universally accepted. And, in the case of Southern European nations, a new category may yet have to be invented. 

'Resurgent markets' seems to be an apt candidate. Just a few years ago, Spain, Italy and Portugal counted among the economic laggards of the continent: the latter had just accepted a €78 billion bailout from the European Union (EU) and the International Monetary Fund (IMF) and worries were mounting that its bigger neighbour would soon follow suit. In the eyes of many investors, a page has now clearly been turned: Spanish 10-year bonds, for instance, currently yield about 1.8 percent – down from nearly 7.3 percent in July 2012. 

Infrastructure specialists seem equally convinced. Enticed by the region's remarkable economic rebound, institutional investors and fund managers are queuing up for Iberian and Italian assets. Last May, Allianz Capital Partners teamed up with Canada's Bastion Infrastructure to buy three metro concessions in Spain; France's Ardian then signed an agreement with Portuguese developer Ascendi Group to own and operate five motorways in the country. The spring also saw Italy host sizeable airport and gas deals by the likes of Ardian, F2i and Morgan Stanley Infrastructure.

The trend continues unabated. Ardian has since opened an office in Madrid in a bid to strengthen relationships with local operators, such as AENA and Abertis. Goldman Sachs-owned utility Redexis Gas acquired 53,760 piped Liquefied Petroleum Gas (LPG) connection points last month. And development finance institutions like the EIB, which was a sponsor of the folded Castor gas storage project, are returning to the market: the lender is considering a possible loan of €900 million to finance a gas network expansion project in various parts of Spain.

The picture is not entirely homogeneous. At one extreme is Greece, which many investors still consider too risky amid persistent capital controls, political uncertainty and a banking system in need of recapitalisation. The government there is still committed to some privatisations, says Dimitris Paraskevas, managing partner of Athens-based law firm Elias Paraskevas, with Germany's Fraport well advanced in its efforts to acquire airport assets. But delays now affecting the sale of Port of Piraeus, caused by snap elections held in September, show timetables remain vulnerable to contingencies. 

Elsewhere in the region activity is gathering pace. Several years of relative political calm in Italy is creating a favourable investment climate, notes Stéphane Ifker, a partner at European fund manager Antin Infrastructure Partners. “It's rare enough to be highlighted. Italy has had some regular bouts of instability in the past.” Economic growth remains tepid in the country but prospects look better for 2016, he believes.


Portugal, admittedly a smaller market, also has its fans. The country has gone through a deeper crisis than Spain, notes Marcus Ayre, a partner at First State Investments, the European unit of Australia-based Colonial First State Global Asset Management. But investors believe Portugal “has taken its medicine”, he says. The country, which after implementing tough structural reforms exited the bailout last year, is now growing again.  

But Southern Europe's new star is incontestably Spain. Reforms have seemingly borne fruit – with the economy now growing at a heady pace – and Madrid can fund itself much more cheaply than it used to. “The market is perking up tremendously. It's always been a very transparent market for investors,” says Ifker. While Italy remains more of a domestic play, he believes Spain is seeing a larger share of international investors and fund managers jostle for a stake in the game.

Promising sectors also vary across the region. Portugal perhaps is the country where the range of opportunities is the least wide, but Ayre reckons clean energy offers bright prospects. He is more cautious on renewable assets in Italy, where he thinks the government is “tinkering around” with tariffs. But other prizes have recently come to the market there, explains Giuseppe Corona, a London-based portfolio manager at Australia's AMP Capital.

Spanish developer Abertis last May raised €2.14 billion by floating Cellnex, its telecom masts business, after deciding to increase its share offering to 60.5 percent from 60 percent on the back of stronger-than-anticipated demand. Telecom Italia also divested part of its towers unit through an $887 million IPO last summer, and is now said to be considering selling another stake in the business. Corona forecasts there are other M&A deals in the pipeline.

What he calls the “multi-utility sector” is also ripe for greater concentration, he says. “For historical reasons there are a lot of small water and gas distribution companies, which create inefficiencies in the system. Concessions need to be consolidated in the hands of fewer operators. The consolidation of the system could be facilitated by injection of equity by willing investors.”

Transport deals are also in investors' crosshairs, with the auction of Rome Airport currently in progress. Budget issues could even lead municipalities to sell motorways, Corona says, which is otherwise largely concentrated in the hands of domestic operator Atlantia.


But when it comes to transportation deals, most investors concur that Spain reigns supreme. The IPO of AENA, the national airport operator, was the country's largest since the Financial Crisis. Further privatisations could be on the cards, reckons Ifker. Rail, including of the light kind, is also on investors' radars; the toll road sector is getting hot again, boosted by optimistic traffic projections. Future deal flow may also cover telecoms, energy and utilities.

This broad array of potential opportunities has not been lost on investors and general partners, which are now said to be scouting the Spanish market en masse. “Prices are very full. Spain may well be on the verge of overheating,” says Ifker. The country's renewed popularity is not making everyone happy. “It's a little frustrating for us, as we continued to pursue quality investment opportunities in Spain throughout the crisis, with limited competition,” explains Ayre. “Today there's a material amount of capital looking to be deployed in Spain and competition is much stronger.”

That's inducing some to consider investing in Spanish renewables again – a development some find rather surprising. After bad planning and over-generous incentives left Spain with 10 times the amount of solar photovoltaic capacity it had initially envisaged possessing by 2010, the government slashed subsidies for the sector drastically and retroactively. Some investors got badly burnt – and yet a number of them are eyeing renewable projects again.

They should bear in mind that the energy regulator hasn't changed overnight, warns a fund manager. “Investors seem to have a short memory. There is indeed a rich pipeline of renewable deals in Spain, but the regulator is neither sophisticated, nor independent. Mostly it's a puppet.” Others wish to nuance this observation, noting that the picture differs widely across sectors. “The wider regulatory regime for utilities is rather stable,” says Ayre. “Changes there have been much more gradual.”

A more salient feature of the Spanish market, for him, is how returns have been compressed over the last few years. Without being a rule, he notes that expected IRRs have decreased by about 200 basis points on some assets. This is happening in a much more liquid environment: international banks have returned and investors are starting to tap capital markets. “The fact that raising debt was very hard during the Crisis has been forgotten. “Today, finding financing is no longer a problem,” observes Ifker.

Still, Corona believes savvy investors can find assets yielding 10 percent IRRs in sectors like telecoms. “If you're a fund focused on Europe, these markets cannot be ignored,” agrees Ayre. For now at least, the sun is shining again in Southern Europe.