Last year, we noted that increased competition for ‘investable’ infrastructure assets was driving up competition and pushing down yields. And we (correctly) predicted that this would drive more sophisticated investors into higher-risk markets, projects and sectors.
Starting this year, we expect that trend to continue, but with some interesting consequences. For one, the lines between the different types of investors will start to blur. We are already seeing financial investors recruit operational teams. Construction companies and developers are creating investment arms. Operators, too, are starting to invest debt and equity into projects in order to move them forward and better balance their risks and returns.
At the same time, the search for yield is changing investment patterns. Greater appetite for risk has meant that new markets and projects are starting to come into scope, taking deal-makers farther into unknown territory. Appetite for greenfield projects is growing in the developed markets while investors simultaneously look for brownfield opportunities and improved value in new geographies. At the same time, many institutional investors are now turning away from the ‘fund model’ and are now looking for opportunities to invest directly into infrastructure assets.
As a result, infrastructure investment teams are starting to grow and become much more sophisticated in how they hold and manage their investments. Rather than focusing passively on financial returns and risk, many are developing important operational capabilities as well. At the same time, operators are developing financial capabilities and developers are building up strategic and financial skills.
Over the coming years, we expect to see the lines blur further as the search for yield continues. Some will make the transition successfully. The risk, however, is that some may move too quickly and, in doing so, take on risks that they do not fully understand with unexpected results.
This trend will continue to have an impact on the infrastructure ‘value chain’ for some time as players jockey for position and assess their capabilities. Funds will still play a major role in the market, particularly in more specialized markets or regions with more fragmented opportunities. Investors will become fundamentally more active – less financially orientated and more operational, and hopefully more customer focused. But over the longer-term, we expect lines to be reestablished as players start to focus on one or two areas of expertise so once the dust settles, don’t expect any of today’s players to look the same.