Private infrastructure investment vehicle

Posted On Friday, 17 June 2011 02:00 Published by eProp Commercial Property News
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In SA, private investment in infrastructure has delivered several highquality assets, like the N3 toll road and the Gautrain.

GautrainIn SA, private investment in infrastructure has delivered several high quality assets, like the N3 toll road and the Gautrain, dynamics that are, in many ways, not connected to traditional asset classes like stocks and bonds. To encourage this investment trend, authorities in many countries have amended pension fund regulations to allow an increase in the proportion of alternative asset classes, like infrastructure.

Infrastructure assets come in various forms, from toll roads to power stations, but they exhibit similar characteristics. These include regulated, long-term predictable cash flows as well as little connection to traditional asset class values and returns.

While some infrastructure assets correlate to general economic conditions, like a toll road that depends on freight users, others do not. A power station has a long-term fixed price offtake agreement with a state utility. But they do deliver inflation-protected returns.

These unique characteristics of infrastructure assets require a different investor mindset compared with investing in other asset classes like property or private equity. Traditionally, the main investors in the infrastructure asset class have been industry players, specialist infrastructure funds and long-term asset managers.

Industry players tend to get involved in the asset early on, by taking a role in bringing a project from conceptual stage to feasibility stage, followed by its design, funding, building and operation. This is often their core business. For example, a private company would bid for a concession to build, own and operate a power station.

In order to demonstrate a strong alignment of interests, an industry player usually holds a significant equity stake in the early, more risky, stage of the project’s life.

Specialist infrastructure funds vary in risk appetite and mandate. Some choose to invest upfront and others prefer to come in later on in an asset’s lifecycle, once it has developed a track record. Both industry players and infrastructure funds usually seek to reduce their shareholding in an asset once it is generating consistent cash flows. They typically sell all or a portion of the asset to investors like pension funds or infrastructure funds. These long-term, risk-averse investors prefer to invest in mature assets with a proven ability to generate cash flows. This makes mature infrastructure assets ideal investments for pension fund managers wishing to match their long-term liabilities with long-term assets.

Private investment in infrastructure can be a powerful tool to deliver national objectives like job creation and long-term economic growth. However, it requires the right skills, experience and patience. As many infrastructure projects require some form of regulator or government-approved pricing mechanism (such as an electricity or toll road tariff), these assets are also exposed to longterm regulatory and political risk, which won’t always suit all investor appetites.

In SA, private investment in infrastructure has delivered several high-quality assets, like the N3 toll road and the Gautrain. The next wave of privately delivered infrastructure is expected to come from the power sector, particularly renewable energy. Government has worked hard to create an investor friendly environment that promises to unlock a new industrial sector, with knock-on effects in the form of job creation and skills transfer.

Greater private investment in this asset class is a promising sign for developing countries like SA, which have a serious need for infrastructure development to propel economic growth and social upliftment.

Musso is senior transactor at Rand Merchant Bank’s infrastructure finance division


Last modified on Tuesday, 29 October 2013 14:46

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