Frustrated SWFs cast eyes
over West's plans to upgrade crumbling assets
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[December 14, 2016]
By Claire Milhench
LONDON
(Reuters) - Sovereign wealth funds are queuing up to finance the West's
overhauls of crumbling roads, bridges and ports as public purse strings
are loosened after a period of austerity, but they still face project
delays and fierce competition for deals.
Offering strong and stable cashflows generated by service users, these
investments hold huge appeal for a $6.5 trillion industry that, with its
focus on future generations, is able to lock up capital for years.
Qatar's sovereign fund was first off the blocks this week, promising $10
billion for U.S. infrastructure after President-elect Donald Trump
floated plans to spend up to $1 trillion on projects that will take
years to complete.
Britain has flagged projects worth nearly 500 billion pounds ($632
billion) including expanding Heathrow airport and high-speed rail,
European governments are backing more spending on energy, transport and
telecoms, and Canada is speaking to SWFs and pension funds to create an
infrastructure bank.
Among developing economies, India has huge power and expressway projects
under way.
But there are few signs yet that the imbalance between SWF demand for
infrastructure assets and accessible supply is easing.
"Never have I seen such a global infrastructure deficit particularly in
the OECD countries, at a time when a lot of these governments are
struggling financially," Adrian Orr, chief executive of the New Zealand
Super Fund, told Reuters. "Yet third-party capital is struggling to get
access."
The fund has 3 percent of its investments in infrastructure.
Since the global financial crisis, cash-strapped Western governments
have been forced to put projects on ice. Some have also resisted foreign
ownership of strategic assets, with an outcry over national security
forcing UAE-based DP World to sell management leases for six U.S. ports
in 2006.
This summer, Britain held up a $24 billion power project on concerns
over Chinese investment in nuclear infrastructure.
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The difficulty that SWFs have encountered sourcing deals whose appeal
has risen as bond yields have sunk and equities turned more volatile,
means that almost two-thirds are underweight infrastructure relative to
their target allocation, according to a study by asset manager Invesco.
A second study by research provider Preqin found that infrastructure
funds, which raise money from investors including SWFs, had accumulated
$141 billion in "dry powder" to invest in 2016 - an all-time high.
HIGHER PRICES
With so much capital chasing a limited number of deals, prices have
risen, particularly for the most attractive assets.
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Preqin
found the average infrastructure deal size hit a record $528 million in 2015, up
from $486 million in 2014 as many winning bids came in higher than expected.
These included the $7.4 billion paid by a consortium involving SWFs for a
99-year lease of Australia's TransGrid electricity network, and the $7.3 billion
paid by another group for a 50-year lease of the Port of Melbourne.
To get into the biggest deals, many SWFs co-invest with peers, and consortia
comprising SWFs and major infrastructure funds - such as the one that bought a
majority stake in Britain's gas pipe network - are typical.
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Now the changing mood music from Western governments heralds a flood of new
opportunities, though this will in many cases mean taking on the extra risk
involved in construction projects.
"Therefore investors will typically look for a higher return component than if
they are improving existing facilities," said Declan Canavan, head of
alternatives EMEA at JPMorgan Asset Management.
Investors may also have to prepare for lengthy delays as governments will still
need to raise funds for new projects via taxation or borrowing, while local
municipalities have shown little appetite for privatization.
"There's a limit to what a population is prepared to pay, and that won't
suddenly rise in huge amounts," said Gershon Cohen, head of infrastructure at
Aberdeen Asset Management.
Cohen, who is skeptical about how much Trump can achieve, says infrastructure is
a hard sell for politicians who are often reluctant to commit to long-term
projects they may not get to cut the ribbon on.
"There's a mismatch between long-term investment decisions and short-term
political thinking," he said. "They need to bring projects forwards – waiting 30
years for a runway is quite clearly an error."
Successive British governments have spoken about a new airport or runway in
South East England since the late 1970s.
(Additional reporting by Karin Strohecker; editing by John Stonestreet)
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