With more and more equity entering the market, competition for ‘investable’ infrastructure projects has reached fever-pitch.
In part, increased flows are being driven by institutional investors eager to put their capital to work. But it is also being impacted by increased investment activity by multinational and sovereign sources (such as the African Development Bank Group (ADBG)’s Africa50 Investment Bank for Infrastructure) which often prioritize objectives other than pure return on investment (ROI) and therefore tend to distort capital market flows and returns.
The problem is that increased equity flows are driving competition which, in turn, is pushing down the yields that investors can achieve on well-understood and low-risk infrastructure investments. Multiples have soared for regulated assets in mature markets; concerns are swirling that some may have already paid too much just to capture a share of the market.
In response, a growing number of the more sophisticated and active institutional investors are starting to leverage their deep experience assessing and pricing risk, and implementing operational improvement strategies to take on a wider range of projects that offer the potential to deliver higher yields.
Some are investing into greenfield projects that naturally carry significant development risk. Others are taking a broader view of infrastructure and investing in social and health assets. And some (particularly the more sophisticated Asian funds) are scouring the ‘frontier markets’ – emerging markets such as Myanmar and Mongolia – to identify potential investments.
Clearly, this is good news for project owners around the world. Indeed, as more equity enters the market and investors gain experience at managing risk in their investments, we expect to see access to equity start to increase and rates start to decrease in both the developed and the developing world. However, governments and owners still need to understand that private capital will only be attracted (and sensibly priced) to markets that create a predictable and stable investment environment.
Over the long-term, this shift will permanently alter the dynamics of who takes what risks, when they take the risks and how. Ultimately, however, we believe that this may well be the tipping point that ushers in 50 years (or more) of prosperity as capital starts to match up with projects which, in turn, will drive economic growth in the developing world and shore up retirement savings in the mature markets.