Reality check

Infrastructure funds in the market are seeking some $94bn in fresh commitments. Take this with a grain of salt. Massive opportunity notwithstanding, not all of these funds will get raised, writes Cezary Podkul.

Infrastructure investors have lately been bombarded with a barrage of friendly figures: $100 trillion worth of infrastructure assets worldwide, $53 trillion in infrastructure spending needed through 2030, $1.3 trillion worth of current and active civil engineering projects in the Middle East. . .

. . . and only about $94 billion in infrastructure funds in market or thought to be coming to market in the next 12 months.

The numbers are compelling, but it may be time for a reality check.

Cezary Podkul

The infrastructure opportunity is obviously massive. But even as Ernst & Young cited $100 billion of PPP opportunities in the MENA region in its latest report on private investment in infrastructure, the accounting firm’s global head of infrastructure, Mike Lucki, warned that PPP legislation is still largely in development mode throughout the Middle East. That could drastically scale down the opportunity for current investors.

Similarly, the $1.3 trillion in current and active civil engineering projects throughout the region, a conservative estimate given Kuwait-based Global Investment House’s $2 trillion estimate, is probably an overstatement of what will be available to private investors – especially those without active relationships in the region.

“At the end of the day, 50 percent of that build could go through PPPs,” Lucki said. 

On the fundraising side, the picture likewise looks rosy. The opportunity is huge, but only $94 billion of global infrastructure funds are thought to be in or coming to market, based on figures released by placement agent Probitas Partners.

Let’s be real – not all of these funds are going to reach their target, and some of them aren’t going to raise any capital. Topping Probitas' list is Kohlberg Kravis Roberts’ yet-to-be-raised $10 billion infrastructure fund. KKR has cut the target by at least half, according to several market sources. Others are sure to follow.

But even as capital is scarce and getting scarcer, infrastructure LPs are only getting more nervous.

“Talking to investors, there have been some worries that there has been so much money focused on brownfields that they thought the prices were pretty high,” Probitas partner Kelly DePonte said.

LPs surveyed by InfrastructureInvestor expressed similar sentiments of too much money chasing the same assets, especially on the riskier side of the spectrum in order to justify higher fees.

“Infrastructure is interesting. The story makes sense, but we have to assess it deeper,” said one LP who has thus far made a concerted effort to stay away from the asset class. 

And the LPs that aren’t nervous about the asset class in many cases simply don’t have the cash for new commitments. Last week, Jay Fewel, a senior investment officer at the Oregon Public Employees Retirement Fund, which has previously invested in Alinda's infrastructure fund, said that OPERF will have little money to invest next year with GPs that do not already have an existing relationship with the $54.5 billion pension.

All the more reason why GPs eager to get into the sector should take its measures of future success with a grain of salt.