The 2007 collapse of the Interstate 35W bridge that spans the Mississippi River between Minneapolis and St. Paul hammered home the sorry state of much of America’s infrastructure. In fact, all components of the nation’s infrastructure, including bridges, dams and roads, earned grades of C or D on the 2005 Report Card (the latest available) for America’s Infrastructure prepared by the American Society of Civil Engineers, or ASCE. ASCE estimates that $1.6 trillion will be needed over the next five years to bring America’s infrastructure into good condition.
It is a world-wide problem. In the developing world, for example, the issue is a lack of basic infrastructure. An annual investment of $220 to $290 billion in global road infrastructure is needed until 2030, estimates the Organization for Economic Cooperation and Development.
The need to upgrade and build physical infrastructure across the globe provides a tremendous business opportunity for companies operating within the sector, as well as the firms that finance them. That has prompted a number of private equity firms to establish infrastructure funds. “Three to four years ago, we started seeing pickup here,” says Michael S. Laveman, a partner in Eisner LLP’s Tax Advisory Services group. McKinsey & Co. estimates that the 20 largest funds have $130 billion under management.
The five-year annualized total return of the Dow Jones BrookfieldGlobal Infrastructure Index topped 15 percent as of September 2008.That compares with 0.28 percent for the Dow Jones Industrial Average.
This up-tick in economic activity in this sector will get a shot in the arm from President Barack Obama’s infrastructure-heavy stimulus package, which will channel $80.9 billion in federal investment to the sector. That outlook makes infrastructure development one of the few bright spots on an otherwise bleak economic picture.
That’s now changing, as many state and local governments find they need to look elsewhere to fund infrastructure projects. What’s more, the longer life spans of infrastructure assets make them appropriate investments for insurance companies and pension funds, says Aaron Regent, senior managing partner and co-head of Infrastructure Activities with Brookfield Asset Management Inc., Toronto, which has invested approximately $16 billion in infrastructure companies, up from less than $1 billion just five years ago, Regent says.
Most funds split their investments between the developed and developing parts of the world. Brookfield, for instance, concentrates 85 percent of its investments within North and South America, where it already has expertise and people on the ground, Regent says. He adds that likely will shift over the next decade or two, as Brookfield builds its presence in Europe, the Mideast and Asia.
That’s not to say that infrastructure projects will escape unscathed from a global decline, Visse adds. As governments’ tax revenues fall, the pace at which they’re able to spearhead infrastructure projects will follow. However, some investment still is needed.
Moreover, infrastructure funds offer cash-strapped governments in the U.S. a source of funding they previously lacked, notes Laveman.
What’s more, governments’ acceptance of private financing and ownership of infrastructure assets varies by country. However, “the capital required and demands on government is not going to relent, so governments are looking to the private sector,” Regent says.