Infrastructure has traditionally been regarded as a low risk, long-term yielding asset class. As a relatively new classification, it has outperformed return projections as it bedded in. As returns from other sectors have been eroded, new investors have been attracted to the segment and existing infrastructure investors have been allocating greater capital to it. Consequently, the value of ‘dry powder’ (unallocated capital commitments available to invest) in infrastructure funds has steadily increased to over $140bn according to Preqin’s latest quarterly report (Preqin is a specialist investment data and research analyst). However, investment opportunities have not kept pace and there are signs that the historical benign investment environment is coming to an end.
KPMG in its 2016 infrastructure trends report highlights that investors are under-pricing risk. The oversupply of equity is driving competition resulting in an overheated market and depressing yields. Investment criteria is being broadened to meet investment targets, including higher risk asset types or regions. These risks are amplified by the trend away from standardised investment models, funding structures and concession contracts. Many newer and smaller investors under-estimate these risks and the level of competence needed to mitigate them. “No normal is the new normal”.
KPMG also identifies a need for more sophisticated asset management as “investors shift their focus from buying new assets to maximizing the performance of the assets they already own”. Achieving the full life expectancy of an asset and enhancing its performance, reducing maintenance costs and improving customer service are now critical to achieving full investment potential.
The public sector is now developing its contract management capability and capacity often drawing on expertise previously employed in the private sector (as seen in the establishment of NHS Improvement earlier this year for example). As public sector competence rises, so will the effectiveness and confidence of its concession management.
This, combined with a drive for better value for the tax payer will expose private sector counter-parties to increased commercial pressure and contractual risk. To mitigate this danger, private sector investors must manage asset performance and contractual compliance monitoring more effectively.
A recent seminar organised by INFIN, the industry group that brings together procuring authorities, project sponsors and institutional investors and lenders, showed that larger, more experienced investors and developers recognised the danger and acknowledged that their strategic focus was shifting from transactions to value preservation. However, such a shift takes time and is not just a matter of cross-training deal originators in asset management. The skill sets are quite different and a step change in asset management capability is needed. To support this, a cultural adjustment from a short-term emphasis on transaction closes and quick wins to a longer-term risk and value management focus should be encouraged. Smaller and newer investors need to prepare for the challenges that these increased risks and more complex assets present.
In conclusion, as infrastructure matures as an asset class, a skills gap is developing in both public and private sectors. As the public sector strives to drive better value from concessions already built and operating, the private sector needs to adjust. Securing investment returns from increasingly complex assets procured in a progressively more competitive market involving an ever more sophisticated and demanding client will be a challenge. A challenge requiring quite a different skill set.