In 2010, Deloitte surveyed the infrastructure investors market. Against the backdrop of the global financial crisis, commentators were questioning whether the infrastructure fund model would last as LPs started to find themselves long on infrastructure allocations
Skip forward to 2013, and our latest survey, we see that momentum across the sector is building with the establishment of direct investors and greater interest from new international entrants.
Amid this increased competition, how will the sector continue to evolve?
We expect to see a greater number of exits in the coming years as first generation funds reach maturity. Many of these will be positive for funds and achieve values consistent with those held on their books. It will also provide further evidence of the IRR confidence we saw in our 2013 survey, where 70% said that IRRs were at or above target.
However, some exits may struggle to meet expectations where assets have been overvalued and the underlying returns of these funds will be lower than expected. This could make future fundraising more challenging for some funds.
In the broader IPO market, activity made a big return in 2013 and there is a strong pipeline emerging for 2014. Given this, infrastructure funds could look at the IPO option when it comes to exiting. This may seem counter-intuitive as the public markets have been targets and a source of deal flow for funds in the past. But we anticipate at least one exit of a transport, renewables or other GDP-linked infrastructure asset to IPO in the next three years.
As part of this wave of exits, we can also anticipate a bubble of secondary asset sales. Many more direct investors are likely to bid where funds have shown stability of returns in the course of their ownership.
The rise of the direct investors has pushed funds to innovate and differentiate themselves. We saw this in our 2013 survey and we expect to see it continue. This could include funds targeting peripheral assets in the markets outside of Western Europe that investors have traditionally found more challenging. We should also see funds looking for opportunities for better partnering with corporates. Those that manage to unlock this, bearing in mind that others have historically had little success, will perform well.
Our 2013 survey found that 41% of infrastructure investors had recruited dedicated asset managers, to the point that they now commonly comprise over one-third of their total workforces. This trend is likely to continue as funds take an increasingly active role in their assets to maximise value at exit.
We will also see new entrants expand into the market. Building on the interest in the infrastructure market from Japanese investors in recent years, Chinese investors are now joining and Korean investors are likely to follow suit. It will not be long before we see new Asian direct investors as active and sophisticated in this market as the Canadian, British and Australian funds.
This may result in asset auctions being extended beyond their traditional six week window to better suit these Asian players. European insurance companies and other principal financial institutions will also be ones to watch as we can see them continuing to take a greater interest in the market.
The supply of assets coming to market, via government and utility divestment programmes restarting and original funds beginning to dispose of their assets, will be off-set by the entrance of these new investors. Add to that the consideration of whether regulatory and political risk has been appropriately priced in the past, we still see an excess of capital chasing core infrastructure assets. Therefore, prices will remain high, particularly as leverage is currently so affordable.
Finally, we see the number of deals in the sector continuing to rise, albeit not at the same rate as the number of new investors entering the market. Some of these will either have a strategic rationale for acquiring assets, or a lower cost of capital than the incumbent funds. Those incumbents who fail to differentiate themselves through their track record, team expertise and their markets, may struggle to compete, resulting in turnover in fund managers.
On the whole, infrastructure investors have emerged stronger and wiser from the economic crisis and, looking ahead, the sector is set for exciting times in 2014 and beyond.