Today’s infra markets looking for “sustainable balance”

Investors underline the importance of cold-headedness in an environment where hard-to-quantify risks can hide behind apparent value.

The maturation of infrastructure as an asset class is not making the origination and due diligence exercises easier ones to carry out, panellists said at Infrastructure Investor's Berlin Summit today.
Asked to assess the state of today's markets, prominent fund managers from various geographies agreed that while prices had visibly crept up for  vanilla assets value remained to be found across the whole spectrum of infrastructure investments. 

True, noted Vincent Levita, chief executive officers of Infravia Capital Partners, the past decade had seen long-term interest rates come down from about 4-5 percent to 1 percent today. 

“But I'm not sure in terms of returns we've lost these 3 percent,” he said. “And I'm not sure the risk premium has decreased. If you compare the risk profile of assets today to 10 years ago we're probably better off now in terms of leverage and capital structure.”

Robert Collins, an executive director at Hastings Funds Management, added that while EBITDA multiples had expanded for some assets, spreads between buyers and sellers had contracted. That allowed more deals to come to fruition: the lucrative sale of UK rail leasing business Porterbrook, in which Hastings invested in 2014, was quickly followed by the disposal of competitor Eversholt earlier this year. 

Yet such observations had to be nuanced depending on sectors, strategies and type of assets targeted, said Alain Rauscher, founder and chief executive of Antin Infrastructure Partners. In the UK, for instance, he observed that some investors weren't shy of paying a price in excess of the regulated asset base (RAB) for investing in water utilities.

This was only justified, argued Mathias Burghardt, head of infrastructure at Ardian, if investors were convinced they could run the asset more efficiently than the market – either through a more astute capital structure or operationally. 

“If you can't do that it's hard to justify. At some point the regulator will notice and adapt the cost of capital it uses in its tariff models.”

The importance of getting such assumptions right brought the panel to dwell upon the notion of political and regulatory risk, which all agreed hadn't gone away. “Some risks can be taken into account into models, but these are harder to quantify: you can't just come up and say I'll move my discount rate 50 basis points one way or the other. These are more about generating go/no-go dynamics through scenario planning,” said Jim Metcalfe, a partner at Alinda Capital Partners. 

Another key area of concern was that of refinancing. While the industry had benefited from ultra-low interest rates since the Financial Crisis, these couldn't last forever, observed Rauscher. 

Erik Savi, a managing director and head of North American infrastructure debt at BlackRock, said that when evaluating transactions with a 20 to 25-year life some investors were happy to assume that assets would be easily refinanced every five years on a fairly aggressive basis – while others remained decidedly more conservative. Keeping one's head cold during bid processes, amid strong competition for assets, was thus no easy tasks for potential bidders. 

Mitigating both risks, Burghardt said, required fund managers to diversify their portfolio, use common sense when assessing valuations and being close to the markets they target. 

“We have risk models on how we price risk. But at the end of the day it also depends on the competitive environment: i's not always possible to know when a foreign buyer is going to come in and destroy your valuation assumptions,” added Savi.

Those investments most likely to prove successful, concluded Levita, were those that created a happy link between the public sector, industrial players and financial investors. “If we do our work correctly we can create value for each of these worlds. But if we don't achieve this balance then what we do is in the end unsustainable.”