Infrastructure investments have held up over the past five years but political and regulatory risk dominates investors’ lists of concerns according to the latest infrastructure investors survey from Deloitte, the business advisory firm.
Deloitte surveyed 25 European infrastructure investors, including infrastructure funds and direct lenders, together holding over GBP200 billion in assets and ‘dry powder’, for its 2016 survey, the fourth in its series.
92 per cent of respondents say their infrastructure investments have proved resilient over the last five years, with 8 per cent saying performance has been mixed
Investors have cut their target internal rates of return (IRR) with 43 per cent predicting returns of between 10 per cent and 12 per cent, a shift from 2013’s Survey when 41 per cent were expecting returns of between 12 per cent and 14 per cent.
Returns in the transport sector have proved strongest, with ports, ‘other transport’ assets and rail/metro assets performing well. Infrastructure services and telecoms assets were also among the highest performers. IRRs were lowest for PFI/PPP assets, water and regulated utility assets. However, returns in all asset classes were lower than those reported in Deloitte’s 2013 survey.
Political and regulatory risks dominate investors’ list of concerns with 38 per cent citing political risk and 35 per cent citing regulatory risk. Overall, 92 per cent say that regulatory risk has increased over the past five years, with 25 per cent saying it has increased significantly. 67 per cent say they expect regulatory risk to further increase over the next five years.
Within Europe, investors perceived regulatory risk to be highest in Iberia, Italy and the UK, with much lower perceptions of risk in Benelux, France and Germany.
Investors were asked to rank the level of focus their funds have on global and European markets. Globally, interest is strongest in Western Europe, followed by North America and Australasia. Interest in China has grown significantly from 2013’s survey, but interest in India, the Middle East and Africa remains low.
Within Europe the most attractive locations for investors were the UK, Scandinavia and Germany. Since 2013’s survey, investors’ interest has also increased in Italy, Iberia and France.
Infrastructure investors are stepping up their involvement in investee companies. 95 per cent say they are actively or very actively involved in their investee companies. Investors are most closely involved in strategic business planning, large project financial management and acquisitive growth decisions.
This focus on asset management has also resulted in a significant improvement in corporate governance structures, with over 95 per cent of investors rating the corporate governance of their assets as good or excellent, up from 60 per cent in 2013.
Investors are confident around the outlook for debt availability. 65 per cent say debt finance will remain steady over the next five years, 15 per cent predict it will increase, while 20 per cent forecast a decrease.
Jason Clatworthy, infrastructure M&A partner at Deloitte, says: “The infrastructure asset class continues to perform strongly and provide stable, secure returns. We expect this to continue through a period of more steady evolution in the infrastructure investors market over the years to come.
“There is clearly a wall of capital looking to deploy into this space. As such, infrastructure investors remain keen to see an increase in deal pipeline, both via the secondary sale markets but, importantly, also in the greenfield space should regulators of governments facilitate this more readily.”
David Scott, infrastructure M&A partner at Deloitte, says: “Investors are focusing the majority of their resources in the traditional infrastructure markets of Western Europe, North America and Australasia. But with the increasing focus of direct investors on these markets, funds are now considering other regions for investment.
“Following a significant fall in attractiveness in our 2013 survey, Iberia and Italy have seen a resurgence in attractiveness and are very much seen as ‘open for business.’ The expectation is that the worst is over for these areas and a more stable future lies ahead.
