Declan O'Brien, Senior Analyst, Research and Strategy Infrastructure

We believe that the current backdrop offers institutional investors an attractive opportunity to step into infrastructure debt and benefit from long duration, stable debt assets with highly visible cashflows. The Organization for Economic Co-operation and Development (OECD) has outlined a need for infrastructure spending around the globe of USD 50 trillion to 2030.¹ If the OECD recommendations are followed, it would lead to investments of around USD 3 trillion per annum, with as much as USD 2.5 trillion required for transportation, utilities and energy. We estimate that this implies a funding gap relative to current forecasts of government fiscal plans of around USD 1.5 trillion per annum. Unless government borrowing and investment plans expand dramatically, this shortfall will need to be funded through private capital. Of course, these figures also exclude the refinancing of debt raised against existing operational assets that mature in the coming few years. The need for institutional capital to fill the funding gap is further accentuated by broader bank deleveraging and by reduced lending to the sector by banks due to Basel III capital adequacy and new risk-weighted lending rules.

With Basel III penalizing banks for lending long-term and amendments to Solvency II making infrastructure more attractive for European insurance companies, major shifts in infrastructure funding are already taking place. In addition, institutional investors’ appetite for higher-yielding alternatives, such as infrastructure, has grown as returns in traditional fixed income markets have become compressed by loose monetary policy.

We view the OECD member countries as the area with the most opportunity for institutional capital given the significant requirement to finance new and to help replace ageing infrastructure. These markets also benefit from a more developed regulatory framework and legal system compared to other jurisdictions – even if the risks of retrospective legislative or regulatory change have increased in the wake of the financial crisis and due to the increased focus on affordability of infrastructure for the end consumer. Regionally, we currently see Europe as the most attractive infrastructure opportunity within the developed world. Backed by powerful fundamental drivers such as regulatory change and investors’ search for yield the European infrastructure market has evolved from a bank-dominated market less than 10 years ago, to one with a growing institutional investor presence—but one where there is sufficient dislocation to provide what we believe are strong opportunities on a risk-adjusted basis.

¹ OECD, "Strategic Transport Infrastructure Needs to 2030", March 2012. http://www.oecd.org/futures/infrastructureto2030/strategictransportinfrastructureneedsto2030.htm