Value of infrastructure deals drops to 4-year low

Infrastructure investors are facing a dilemma about how to put the substantial funds they are sitting on to work with intense competition for the best assets having driven up valuations and amid heightened political risk.

The first quarter of 2018 is on track to be the worst three-month period for infrastructure dealmaking in four years despite a wall of money pouring into the sector.

More than 500 deals worth $58.9bn were struck in the three months ended March, according to preliminary data from Preqin, the lowest level since the start of 2014 when deals worth $56.4bn were recorded. Dealmaking has topped $100bn in eight out of the past 12 quarters.

Analysts said the downtick signalled a willingness by investors to hold fire on deploying money earmarked for infrastructure projects after competition for desirable assets over the past couple of years pushed up valuations, rather than a downturn for the sector more generally.

“Lots of dry powder and lots of competition are really pushing up prices of assets [and] that is what’s really causing the slowdown [in deal activity],” said Patrick Adefuye, head of real assets at Preqin.

However a febrile political environment in the UK is also making investors more cautious. Although the government has signalled a retreat from austerity the possibility that Jeremy Corbyn and Labour, who want to nationalise Britain’s railway, water and energy companies as well as Royal Mail, may win the next general election is causing alarm.

“We have Corbyn talking more aggressively on certain infrastructure assets,” said David McCann, analyst at Numis. “A lot of these [projects] rely in some shape or form on government licences to do what they do.”

Global fundraising for infrastructure deals in the first quarter was the slowest since mid-2013 but money continued to flow into the sector as investors hunted for better returns in the low interest rate environment. Global fundraising for infrastructure projects was $5.7bn in the period.

But analysts said investors are increasingly alert to the risks of committing vast amounts of capital to projects and do not want to indiscriminately put money to work.

“There’s this big issue around the bankability of projects. The types of deals investors want don’t always match where the infrastructure is,” said Sarah Tame, associate director at the Edhec Infrastructure Institute. “Everyone is chasing trophy assets.”

A report by Brussels’ auditors published in March outlined the problems many encounter, saying many infrastructure projects funded through a combination of private and public money had “suffered from widespread shortcomings” such as large budget overruns and delays.

“EU co-financed Public Private Partnerships cannot be regarded as an economically viable option for delivering public infrastructure,” the European Court of Auditors said in a report that examined projects in France, Greece, Ireland and Spain worth €9.6bn, which had received €2.2bn of EU funding.

However EU countries risk their economic prosperity by spending too little on infrastructure, the European Investment Bank warned last year, noting that government investment in the sector is at a 20-year low.