Rise of direct investors compounds lack of supply problem

Infrastructure investors have managed to sail through the economic downturn largely unscathed, according to a recent study.

The Deloitte Infrastructure Investor Survey, which polled funds and direct investors representing around 50 percent of London’s infrastructure investment community, found that 70 percent of them were achieving or exceeding their targeted internal rates of return (IRR) – for most of them ranging between 12 and 14 percent.

This had been achieved by focusing on core infrastructure in ‘safe-haven’ countries. Western Europe remained the most popular destination for investments, followed closely by North America and Australasia. Regulated utilities and transport, meanwhile, were seen as the most promising areas over the next two years.

Yet despite a common view in the past that direct investors would be a passing fashion, the report showed that their status as worthy competitors to infrastructure funds was no longer in question. Around 45 percent of large funds – those seeking to invest in deals above £500 million (€598 million; $808 million) – viewed direct investors as their principal rivals when it came to compete for assets, in front of other funds (31 percent) and trade buyers (25 percent).

This was owed to the significant investment capacity the former had managed to build, often through the recruitment of experienced investment professionals and expansion of existing teams. Even at the small and medium level, direct investors were deemed a notable threat, with 31 percent of funds polled citing them as their prime competitors.

This trend was compounded by the limited supply of desirable assets available for purchase. “There is a lack of assets coming to market as disposals by major European utilities and governments have yet to transpire. This is leading to increased competition across the sector,” commented David Scott, a partner in Deloitte’s infrastructure M&A team, in a statement.

Regulatory changes remained another key concern, with 72 percent of investors polled citing them as the biggest risk facing their investee companies.

Yet infrastructure funds were deemed better equipped to confront competition and regulatory challenges than at the beginning of the decade. “The key to funds’ strong performance in recent years has been a significant investment of resource in dedicated asset management teams as they look to improve their performance through value enhancement,” Scott observed.

More than 40 percent of respondents said they had recruited dedicated asset management teams, which now typically represent more than one third of their total workforce.