Source: Factset 12 Dec 2011 (Note: PPP Index comprises John Laing Infrastructure, HICL Infrastructure Company, 3i Infrastructure plc, International Public Partnerships Limited)
With this in mind, it is critical that investors bid for the assets that suit their risk profile and provide the returns they desire, giving sellers the most achievable price for their assets. The aim is to structure portfolios of infrastructure assets with the appropriate risk profile for the pools of capital available. Rather than embark on a series of minor and time consuming disposals, sellers of a variety of smaller transport assets could consider setting up a special purpose vehicle (SPV) with an appropriate mix of investments. Key considerations in constructing a portfolio would include an appraisal of the location, subsector, size, stage of development, extent of control, concession life, volume risk, leverage, expected yield and general risk profile of each asset. Such a portfolio could then be floated on a stock exchange via an initial public offering (IPO). There should be plenty of willing buyers for appropriately structured portfolios, particularly in the public markets, if the investors can rely on regular income streams from governments in developed countries. The London Stock Exchange currently has four identifiable listed infrastructure funds with a current combined market capitalisation of GBP2.7 billion, supported by a range of participating European, US and Asian investors. These defensive stocks have performed particularly strongly in recent months against a volatile equity market. Those selling larger portfolios of economic infrastructure assets (e.g. airports) could pursue a dual-track option, looking to access trade buyers as well as considering a public market listing. The higher levels of risk in these assets may be appropriate for more active buyers, such as infrastructure funds. Sovereign states still own a large majority of the largest and most valuable infrastructure assets in the developed world. In order to build new infrastructure, as leaders such as Osborne and Obama are planning, governments may need to raise money from the sale of existing assets, often through concession sales. Consortia of large infrastructure and direct pension fund investors are generally the only financial acquirers with the financial muscle to bid on the largest assets. Notable recent transport infrastructure privatisations include the sale of HS1 (the channel tunnel rail link) in the UK and the Queensland Governments programme of asset disposals including ports, railways and roads. There is an active pipeline of privatisation opportunities in Europe, including the sale of Aena airport concessions in Spain and a toll road network concession in Turkey. The publicity that global leaders are creating around the need for new infrastructure plays right into the hands of owners of established assets. Osborne and Obama are waking the sleeping giants in the pension fund industry, and directing their cautious gaze towards increased investment in infrastructure. In the process, a significant amount of their capital is likely to be directed towards established assets, which can offer a reassuring track record of inflation-linked cash flows. The key for sellers is to put the right structure in place in order to attract appropriate capital and secure the best achievable valuation.
*The Roots of Growth | Projecting EM Infrastructure Demand to 2030
Published 29 Sept 2011 by Timothy Ash, Imran Zaheer Ahmad, David Petitcolin (www.rbsm.com)
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