Let private equity find a new socially advantageous role for itself

By Paul Mackintosh - 09/12/13

Following last week’s item on the closure of Brookfield Asset Management Inc’s Brookfield Infrastructure Fund II at US$7 billion, the second largest infrastructure private equity fund ever raised, just behind 2012’s Global Infrastructure Partners II with $8.25 billion, some more data points have come in regarding infrastructure as an asset class. The Deloitte Infrastructure Investors Survey 2013, just in, states that “the infrastructure asset class has successfully weathered the economic storm, with many investors citing that their investments have remained resilient”, with 70% of the poll reporting investments matching or exceeding target internal rate of returns (IRRs), typically “an IRR of 12-14%”, with typical cash yields of 5-7%. Unsurprisingly, “investors are bullish about the sector’s prospects”, notes Deloitte. “For those who sounded the death knell for infrastructure funds as an asset class a few years back, we are pleased to say that the investors have emerged stronger and wiser from the experience of the downturn”.

It’s worth reflecting on what role private equity infrastructure investment can play in the broader environment – and what that says about public institutions. Some prime infrastructure investment opportunities have opened up not in the developing world, but in mature Western economies, where the familiar and robust regulatory environments offer excellent risk management prospects. All well and good – except that the main reason for those opportunities is sustained under-investment by policy-makers and politicians over the decades, especially for the US and “core infrastructure assets located in the safe-haven geography of Western Europe” (Deloitte).

Safe haven from what? Obviously not from the depredations of the region’s politicians, whose malfeasance has created the infrastructure deficit that now needs funding. And, the Deloitte survey adds: “Regulation is seen by the investors as the key risk, both from an investment and asset management perspective. What was once seen as a key attraction for investing in infrastructure assets is increasingly being treated with trepidation”. And these are not actions in unstable Third World economies. Norwegian moves to change tariffs on its Gassled system, Spanish government action on solar energy tariffs, and UK water pricing reviews are singled out by Deloitte. “The majority of investors already consider the regulatory regimes in Italy and Spain to be extremely challenging and likely to remain so”, notes Deloitte.

By all means, get those assets into private hands; let private equity find a new socially advantageous role for itself and let pension fund limited partners benefit directly from the proceeds. Because public financing of them has pushed Western infrastructure development into reverse gear. And too many politicians seem content to continue building roadblocks or throwing sand into the gears.