Mercer: Infrastructure on the Rise, Yet Lacking in US

(May 2, 2011) — The demand for private sector involvement in infrastructure investments is on the rise, according to Mercer.

The consultancy notes that over the past six months, the firm has boosted its exposure to the asset class. But, while infrastructure investment has taken off in the UK and Australia, for example, opportunities in infrastructure investment in the United States are lacking. “Infrastructure investment hasn’t taken off in the US,” Mercer spokesman Mercer Salmans told aiCIO.

Recent deals finalized in the first quarter of 2011 now give Mercer portfolios stakes in a German gas transmission utility and a Czech transmission towers business. The deals follow last December’s seeding of another manager, Westbourne Capital, to provide exposure to a range of investments, such as the port assets of the Newcastle Coal Infrastructure Group.

The deals also complement earlier investments by Macquarie in French toll road operator APRR and investments in a range of Australian and UK infrastructure assets via Colonial First State Global Asset Management.

“We believe unlisted infrastructure enhances diversification and reduces equity risk thanks to its lower correlation with listed markets,” Melbourne, Australia-based Russell Clarke, Mercer’s chief investment officer and leader of it’s portfolio construction team in Asia Pacific, said in a statement. “It’s an asset class with some unique diversifying characteristics that we’ve identified as critical to achieving an appropriate balance in our investment portfolios.”

Clarke continued: “The winners in today’s infrastructure market will be investors who pay sensible prices based on realistic assumptions for future growth and inflation, at appropriate discount rates. Those who can strike the optimal capital structure for an asset and have a superior ability to manage it effectively once acquired will be successful investors.”

The commitment to infrastructure in the UK — which has been largely leading the growth in infrastructure investment — can be seen by a report by the London-based Business Infrastructure Commission, which concluded that the government should provide incentives to encourage pensions to invest in large-scale projects in the region, which suffers from “some of the most congested and problematic infrastructure.” Professor David Begg, chairman of the Business Infrastructure Commission, urged in the report that the government should focus on piecing together the so-called infrastructure puzzle by concentrating on a detailed long-term infrastructure strategy and on procurement reform and improvements to the planning system for major projects. Additionally, the report advised focusing on attracting private finance by enabling the pension and insurance industry to increase levels of investment in infrastructure by introducing a stable regulatory framework and appropriate incentives.

A recent study by Preqin has provided further evidence supporting the uptick in infrastructure investment, particularly in Europe. Europe is leading the growth in cleantech unlisted infrastructure with public pension funds ranking as the most prominent investors, the firm showed. “It is unsurprising that the industry is particularly advanced in Europe; all governments are bound by the 20:20:20 agreement and are offering strong incentives for development of clean technology and renewable energy solutions,” Elliot Bradbrook, Manager of Infrastructure Data, said in a statement, referring to the European Union’s overall goal of reducing greenhouse gas emissions and energy use by 2020.