“Facts are stubborn things, but statistics are pliable.”
— Mark Twain
Everyone is talking about what a great year 2013 was for infrastructure fundraising (and for real estate fundraising and for the stock market and for lots of other investment vehicles, except maybe not bonds). According to the IREI FundTracker database, 21 infrastructure funds closed in 2013, with an aggregate total of more than $29 billion raised. And this is just capital raised in closed-end funds that actually closed. Tens of billion dollars more flowed into the 206 listed and unlisted funds still marketing, including the 31 that launched in the past year, making 2013 one of the best years — if not the best year — for fundraising since IREI began tracking results.
It’s this type of news that encourages infrastructure participants to high-five each other and begin believing that infrastructure might be moving out of the “emerging” category. And it makes mayors, governors and congressmen begin to think that all of those crumbling bridges and gridlocked motorways are just one investment deal away from being fixed.
But as sportscaster Lee Corso is wont to say, “Not so fast, my friend.”
Just as the world economies are rebounding in an uneven fashion (an auto worker in Detroit and a stockbroker in New York City will have very different answers to the question, “Is the U.S. economy improving?”), infrastructure funds and sectors are not all created equal.
Of the 21 funds that closed in 2013, four raised more than $2 billion each and accounted for 54 percent of the total capital raised. One fund alone, Brookfield Infrastructure Fund II, raised $7 billion — or nearly 25 percent of the total.
Eight of the funds opened and closed in one year or less. Brookfield managed to raise that $7 billion in only seven months. Rockland Power Partners raised $425 million in two months. But others took much longer. Ten of the funds took two years or more, with one fund finally closing after four years of fundraising. And these are the funds that managed to close. Most of the funds still in the market have been there for more than 18 months. There are a lot of tired fundraisers out there.
Energy- and utilities-focused funds received the lion’s share of attention from investors. Transportation, social infrastructure and niche strategies struggled. Disappointing results from earlier high-profile deals involving toll roads and airports have dampened enthusiasm for this sector. It will undoubtedly rebound, but investors are looking for clarity on exactly what some of these projects are worth today — and how to underwrite for future demand. What kinds of returns are really realistic?
And therein lies the crux of the problem when governments and municipalities look to the private sector to fill the infrastructure gap. They approach the sector from different directions, and like the first attempt to connect the tracks for the transcontinental railroad, miss each other by “this” much.
Municipalities are looking to fill a need.
The private sector and pension funds are looking to make money. If they can make that money by doing good, so much the better. But pension funds have a fiduciary duty to provide for their pensioners. And the private sector has a duty to provide for its shareholders.
This means that if the need to be filled involves energy, that need will have a ton of capital to work with. But if it involves roadways or bridges, the municipality will be out of luck. And if that roadway or bridge is a greenfield project, the town council might as well start playing the lottery to find the capital.
This is where the federal government could help. When subsidies and tax credits are offered, investment increases. Investment in wind energy soared on the wings of subsidies. Solar energy is still shining because of tax credits. Affordable housing gets built because of tax credits and other incentives. The same could work with infrastructure — as long as the right projects are targeted. And those projects should be those that are needed but don’t provide enough of a return for the private sector to be interested.
There has been lots of talk about stimulus funds being used to build new in infrastructure — but not much building has really occurred. It would seem that simply offering tax credits to increase return would be a more efficient way to get the private sector interested in projects that need doing, and get things moving. If incentives are structured correctly, we might even find the private sector interested in taking on greenfield risk and building the infrastructure needed for the 21st century and beyond.
How would you encourage private sector investment in some of the desperately needed but out-of-favor projects?
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Sheila Hopkins is managing director – Europe and infrastructure with Institutional Real Estate, Inc.
