Two trends have marked the world of infrastructure investing in recent months. On the face of it, both of them should be good news for the market. In the wake of recent history, however, both of them raise questions about whether these events are concealing something deep beneath the surface of the news. They also raise doubts about what has emerged as conventional wisdom in the sector.
The trends are the pick-up in the pace of acquisitions and disposals and the simultaneous pick-up in fundraising, or at least a pick-up in declarations of fundraising ambitions. The easiest conclusion to draw is that liquidity is returning to the market, a reflection of confidence. Investors are willing to buy assets and bankers are willing to provide debt. Similarly, the many funds going out to raise capital may be a sign that limited partners are again opening their checkbooks. That, too, is a sign of confidence.
The easy conclusion may also be the correct conclusion.
Is there, however, a chance that something else is going on? That the two events are driven by separate forces, which don’t suggest the asset class has emerged from the slump, but rather that deals, while more frequent, are being done under new, slump-like terms. Economists talk about a new normal in the wider economy. The infrastructure market may be discovering its own new normal.
Not long ago, asset buyers were complaining that asset sellers hadn’t yet understood that the world had changed, that the prices weren’t coming down enough to reflect the declining liquidity in the market and the shift in business fundamentals in many assets. Are the sellers finally throwing in the towel, abandoning hope of realizing desired prices and taking what they can get? That’s good for those who make a living on deal fees, but not so good for those paying the price of this realization. Or are the buyers pushing up prices again to get their hands on assets? That too is good for those who live off deals, but not for those depending on returns.
Not long ago, the market was expecting more and more assets and projects to come to market as governments realized they couldn’t afford to procure infrastructure without help from the private sector. But fiscal strains around Europe are forcing governments to cut spending. That isn’t leading to more PPP procurement; it’s leading to projects eliminated, pared back, and stretched out over time. Is the recent deal activity a measure of the view that the pipeline of new assets remains clogged and the buyers are circling a narrower set of assets. That’s good for sellers of those assets, but raises the old worry that buyers aren’t being discriminating enough.
Not long ago, infrastructure funds and limited partners were saying that those funds that could demonstrate a return would be able to raise new capital and those that couldn’t were doomed to go the way of 95% leverage. But InfraNews has been reporting about newly-created funds, going to market for the first time. Will the limited partners be willing to commit capital to such unproven entities? If they do, it will be good for infrastructure funds, and eventually for asset sellers, but perhaps not so good for those ultimately providing that capital.
Admittedly, the above speculation is at least in part contradictory. Sellers aren’t likely to be abandoning hope for high prices if buyers are again becoming reckless. But there seems little question that the mergers and acquisitions market and the fundraising market are starting 2011 with an energy not seen for a long time.
If 2010 was the year in which the infrastructure market emerged from the crisis, then 2011 could be the year in which the market discovers whether it truly learned any lessons from that crisis.
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