In a recent Preqin survey, 42% of investors stated that both asset valuations and the availability of bank debt are major problems within the current infrastructure market. 2010 deal flow is significantly down on previous years, with 113 deals completed by unlisted infrastructure fund managers so far this year, compared to 207 in 2009, 229 in 2008 and 217 in 2007. This is in part due to the relatively slow fundraising market, but also to vendors’ unrealistically high asset valuations and the continued reliance on debt to finance infrastructure projects.
Infrastructure investments traditionally require a significant level of debt financing, but the ongoing impact of the financial crisis means banks are now less willing or able to allocate this amount of debt. One surveyed investor commented: “Maximum debt levels should not exceed 35% of total value. It is ridiculous that so many infrastructure deals use such high levels of leverage.” In order to combat this, fund managers must be willing to increase the equity-to-debt ratio associated with infrastructure deals and vendors need to address their price aspirations.
Fund manager industry knowledge is also vital to overcoming these issues. Knowledge of a specific infrastructure industry will ensure fund managers are able to source appropriately priced assets and counteract the risks associated with high proportions of leverage.
This blog is an excerpt from this month’s Infrastructure Spotlight feature article based on the findings of a recent Preqin survey of institutional infrastructure investors.
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