- Investors have flooded the market over the last decade in search of traditional assets such as toll roads, airports and electrical generation facilities
- Returns for these assets have fallen in part due to a glut of new investors
- Flagging returns can be mitigated by looking beyond core infrastructure assets such as roads and bridges
Investors will have to begin using a private equity approach to infrastructure as the market continues to evolve.
“Investors used to make money buying assets, but that assumes you can buy at multiples that are opportunistic,” Andrew Claerhout, senior advisor at Boston Consulting Group said at the 10th Annual CG/LA Infrastructure Leadership Forum. “Now, you need to develop a robust and creative value add plan to grow and reposition infrastructure assets.”
Claerhout, former senior managing director for infrastructure and natural resources for the CAD $180 billion Ontario Teachers’ Pension Plan (OTPP), noted that part of the reason for the shift to a private equity mindset is driven by increasing government deficits that compromise its traditional role in infrastructure delivery. Moreover, as investors have flooded the market over the last decade in search of traditional assets such as toll roads, airports and electrical generation facilities, they have cut returns by half.
Research from Boston Consulting Group and CEPRES shows that the multiple of capital for infrastructure investment dipped to 1.41x in 2016 from a 1.72x in 2006. That multiple fell further to 1.06x in the middle of 2016.
Flagging returns can be mitigated by looking beyond core infrastructure assets such as roads and bridges. But the pace of technological development is also playing a significant role in helping investors meet their return expectations.
“We are now seeing infrastructure-like opportunities from less conventional sources.” – Andrew Claerhout
“The infrastructure investing market is broadening to include a new class of smaller, distributed, tech-intensive infrastructure assets,” he said, referencing developments such as smart metering and ride sharing apps such as Uber Pool. “We are now seeing infrastructure-like opportunities from less conventional sources.”
Consumer demand for increased customization, responsiveness and innovation now requires investors to add a service component in order to realize return, Claerhout said. As a result, the need for active management of infrastructure assets has become more pronounced.
“Management teams, moving forward, will be given both capital and a mandate,” Claerhout said. “There is a sense of urgency, and we need to see capital as being transformative.”