Infrastructure has become a major theme in the global investment community with spending expected to average $2-trillion annually through 2015. More than half of that is forecast to come from emerging economies. At the same time, the developed world is being forced to rebuild ageing infrastructure like airports, expand inadequate assets and respond to new demands like climate change.
In emerging markets, the public sector can tap large current account surpluses. But developed countries are seeing more private investment from sources like private equity, pension funds and sovereign wealth funds, which means reduced vulnerability to slowing spending in the public sector, Edward Kerschner, managing director of U.S. equity research at Citigroup said in a report.
All of this spending means opportunity for “builders” like engineers and construction firms. But “owners,” particularly private ones, that many cash-strapped governments in developed economies have turned to, can leverage both their experience and infrastructure assets to cash in on what Mr. Kerschner calls “economies of skill.” Meanwhile, since private ownership in some developing economies is not possible, the best opportunity is often for “operators” to pursue public-private partnerships, he noted.
Figures show that $120-billion was raised by private infrastructure investors in the fifteen months through June 2007, while established infrastructure operators only have $40-billion in capital available to invest. Mr. Kerschner puts these two numbers together ($160-billion) and levers it up with 80% debt to produce $800-billion in potential funding for new projects. But even if all of that were to be spent on new building and upgrading of existing assets, it would still be well short of the $2-trillion in forecasted annual global infrastructure expenditures.
While pension funds have for the most part been slow to allocate funds to infrastructure, Mr. Kerschner notes that Australia and Canada have been quicker and therefore have higher levels of investment. Institutional investors also have the choice of whether they want to invest in an infrastructure fund or a project directly. Even the U.S. Senate Banking Committee is taking a look at establishing a new national bank specifically focused on investments in infrastructure priorities.
Estimates show that the world’s 20 largest infrastructure funds have nearly $130-billion under management, with 77% of this raised in 2006 and 2007. New entrants, meanwhile, account for roughly 63% of this money, according to Citigroup.
Mr. Kerschner said there are hundreds of companies that stand to benefit from the various infrastructure trends, highlighting many of them in the report. Nokia (NYSE:NOK), for example, the world’s largest mobile phone maker and a provider of telecommunications network equipment, was mentioned since 28% of its sales were in emerging markets in 2006.
In water infrastructure development and wastewater treatment, an area that many expect to grow as emerging markets like China see their economies expand, Veolia Environnement and Suez, the world’s two largest private water companies, were highlighted as names that could engage in public-private partnerships.
In terms of the push to regulate greenhouse gas emissions and other climate change initiatives, Citigroup highlighted names like wind turbine manufacturers Vestas Wind Systems (OTCPK:VWSYF) and Gamesa (OTCPK:GCTAF). For more efficient power generation, companies like General Electric (NYSE:GE), Siemens (SI), Alstom (OTCPK:AOMFF) and Fluor (NYSE:FLR) were mentioned.