Investors may be overestimating the capacity of infrastructure
as an asset class to meet return requirements, according to Deutsche Bank analysts.
Infrastructure projects’ “supposedly attractive risk-return
profile” is “illusory,” the analysts wrote in a multi-asset research note.
“Bringing private capital to bear on the public infrastructure problem is an idea whose time has yet to come.”While there is an estimated $1 trillion funding gap for
infrastructure due to cuts in government spending in many developed markets,
private investors “could provide just 15% to 20% of this projected funding
shortfall,” Deutsche Bank said.
“The vast majority of infrastructure is a public good that
does not offer a viable revenue model to cover costs let alone provide adequate
returns,” the analysts wrote. “The relatively few revenue robust projects have
little difficulty attracting capital. Indeed for these projects the problem is
too much money chasing too few opportunities.”
President Barack Obama has launched a number of initiatives
aimed at increasing private sector investment in infrastructure, including a $10
billion fund aimed at rural opportunities, and the Build
America Investment Initiative.
In the UK, the government has pushed through major reform of
authority pensions with the aim of creating asset pools with the scale and
resource to invest in infrastructure assets. However, several commentators have
expressed concern that the supply of suitable assets will not meet demand.
In addition, as projected returns are based on cash flows
and “appraised values,” the actual returns available from infrastructure are very
uncertain. With more money flowing into the sector, regulators “may require
more rigorous appraisal methods, leading to more volatility, lower Sharpe
ratios and higher correlations,” Deutsche Bank said.
The analysts argued that “it may take another crisis for the
public and private sectors to collaborate and create investment vehicles that
make economic sense.” Alternatively, larger collaborations between investors—as
occasionally seen between Canadian and Middle Eastern funds—could the achieve
critical mass and expertise necessary for successful direct investments, they
“Until then, investors interested in infrastructure must
rely on more traditional investments, such as utility equities and bonds,
syndicated project loans, and municipal revenue bonds,” Deutsche Bank said. “Simple
as it sounds, bringing private capital to bear on the public infrastructure
problem is an idea whose time has yet to come.”
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