Infrastructure investments are relatively recession-proof, says Krista Hill in Financial Post

October 08, 2008

As governments acknowledge the need to expand and repair infrastructure across the country, new highways, transit and bridges are increasingly perceived as safe investments for those financing the projects.

Various investment funds have recently been created to provide infrastructure financing and take advantage of low-risk returns. Retirement funds and insurance companies are also diversifying into infrastructure and private equity opportunities, seen as ideal long-term investments that offset the fluctuating stock markets.

Infrastructure project advisers say the work is interesting and plentiful. British Columbia, Alberta, Ontario and Quebec recently established Crown agencies to facilitate the building and refurbishing of schools, courthouses, roads and bridges. The agencies seek private investment for the DBFO (design, build, finance and operations) of public-private partnerships (P3s). Infrastructure projects are especially attractive to funds because they are tangible assets with a local risk profile.

To invest in infrastructure, a fund must get involved with a bidding consortium, which includes designers, engineers, builders, operators and other financial investors. The consortiums bid on tenders that are sought by government organizations seeking to create P3 investment into a specific infrastructure project.

Three or four consortium bidders typically compete for a project, and each includes many parties seeking to harmonize different terms and arrangements. The perceived stability of infrastructure investments has builders and facility management companies offering up their own equity. For example, Ellis Don, Carillion Canada and Spain's Acciona will finance and spearhead the development of infrastructure projects.

"It is relatively recession-proof," says Krista Hill. "The risk profile for this type of asset is less, so you have to be willing to take less of a return on that investment rather than the private equity returns that are riskier." The opportunities are global: "You've got a lot of money out there chasing infrastructure assets at a time when the Western world's existing infrastructure needs to be replaced and in the developing world, in India and China, there are massive demands for infrastructure."

Finding infrastructure investment opportunities is becoming competitive, says Krista. Torys' M&A practice group forecast last year that as infrastructure and pension funds seek to deploy their capital and governments get comfortable with private-sector investment, there would be more M&A activity in the sector: "That has come to be true." Yet because the sector is new, there is progress to be made when it comes to understanding risk and opportunities in the field.

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