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Global infrastructure deal value could exceed USD500bn

The demand for infrastructure funds remains evidently strong. Last year, these vehicles raised USD62.9 billion in aggregate based on figures provided by Preqin*. In Q1 2017, that number had already reached USD29.5 billion; nearly twice the amount raised in Q1 2016 (USD16 billion). 

“We’ve seen increasing interest in infrastructure deals, both listed and unlisted,” states Michael McCabe (pictured), Head of US Sales, MUFG Investor Services, the global asset servicing arm of Mitsubishi UFJ Financial Group. “The number of deals in Q1 2017 for the US totalled USD50 billion and was fairly concentrated in the energy sector; natural resources, utilities, power plants. This year we should see north of USD500 billion committed to infrastructure deals, globally.”

Asia recorded the highest level of financings, globally, in 2016. Some 552 deals were completed for a record USD131 billion. Europe recorded the highest number of deals (555), worth USD97 billion, while North America attracted USD96 billion. 

“Australia is one of the key infrastructure markets. There has been an increase of pan-Asia deals in that country along with an increased presence of Chinese development banks. Between the China Development Bank and the Export-Import Bank of China, they are becoming major investors in this space,” observes McCabe.

Then there is the Asian Infrastructure Investment Bank (AIIB), a regional investment bank proposed as an initiative by the Chinese government that can lend up to USD250 billion for infrastructure. Doubtless that figure will rise over time, especially if one considers that China has USD900 billion of infrastructure projects lined up to connect Asia with Europe. 

The US infrastructure market grew 14.4 per cent from 2015 to 2016, says McCabe. With the administration trying to get a USD1 trillion spending package through Congress, there is reason for optimism. 

“There are thousands of failing bridges, roads and railways that need to be repaired so even without the spending package, infrastructure spending was still a necessity. The question is, where does the money come from? Will it be fully government financed? Will the taxation regime be reappraised to help attract more private infrastructure funds to enter into public private partnerships? And if so, what are the risks associated with that? 

“There are lots of questions that require answering to address America’s infrastructure needs,” says McCabe.

One clear trend that has emerged in this asset class is infrastructure debt. USD11.5 billion in infrastructure debt was raised in 2015, compared to USD4.5 billion in 2014. In 2016, the unlisted infrastructure debt market sought USD25 billion in target investor capital for a record 43 unlisted infrastructure debt funds, mainly in North America and Europe. 

Such is the level of growth in infrastructure that one of the main considerations for investors is determining the level of risk. Do they commit longer term to greenfield sites with no immediate revenue streams, or invest in existing assets? Projects such as the Fort Mojave Solar Project and the Alaska Pipeline are operational assets while the Chicago Union Station Redevelopment, for example, currently has no revenue stream.

“Built assets appear to be more favoured right now but as a consequence this is pushing up valuations. That means there are risks to infrastructure managers potentially buying frothy assets,” says McCabe. 

“Pipelines, wind farms, oil storage facilities. Those are areas our clients are involved in right now, raising funds with USD10 billion or more in assets.” n

*The 2017 projections and deal volumes / projects were from Preqin’s Quarterly Update: Infrastructure Q1 2017 published in April 2017. 
*The infrastructure debt – listed and unlisted – stats were from a September 2016 Preqin spotlight on that asset class.

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