ANALYSIS

Every cloud has a silver lining for infrastructure

McCARTHY_John-june2010Fiscal constraints around the world, but especially in Europe, are leading to a surge in investment opportunities in various asset classes. Greg Bright reports on one.

Record issuance of government bonds is changing many markets, and privatisations and public-private partnerships are expected to mushroom.

Against this backdrop, one of the largest international infrastructure managers, Deutsche Asset Management subsidiary RREEF Infrastructure, said that business models used by commercial managers are also changing.

John McCarthy (pictured), managing director and head of RREEF Infrastructure based in London, said the focus for his group is currently on Europe because it is probably the most fiscally constrained of the major markets.

“That’s where the greatest opportunities are,” he said. “The fiscal crisis represents a massive opportunity.”

He estimated that there is a pipeline in Europe of infrastructure projects requiring about €26 billion ($31.8 billion) in equity.

The US market, on the other hand, remains a slow developer, particularly in transport infrastructure, largely because of the problems related to state ownership and various political and macro problems.

RREEF, which operates on a regional basis around the world, has made 31 acquisitions since inception in 1994. It currently has 15 assets valued at $8.6 billion.

McCarthy said good infrastructure managers were changing their business models to suit the new post-financial crisis environment.

Initially infrastructure funds were all based on the private equity model, typically charging “two and twenty” fees (2 per cent base and 20 per cent performance above a hurdle) and with 10-year closed-end vehicles.

Many infrastructure funds were promoted by investment banks with “reasonably loose investment strategies”, he said. These funds were now having issues with their performance.

“We have actually seen the leverage (in the investments) at the fund level bringing down the managers,” he said.

Most infrastructure managers are bringing down their fees now to an average of about 1 per cent base plus a performance fee, which is being restructured by managers to align better the interests of investor and manager.

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