February 5th, 2014
Global Infrastructure Investment to Reach $4T by 2017

The Bain research categorizes private infrastructure investment into two groups: Core infrastructure sectors like electric utilities, oil & gas, and transport, which will grow at an average three percent per year through 2017, and Social infrastructure such as water, healthcare, and education which will grow at an annual average of four percent over the same period. As private investors look to infrastructure as an asset class, however, two core challenges have emerged. First, regulatory and economic instability within individual markets can act as a deterrent, especially to investors with less infrastructure expertise. Second, lower costs of raising capital and fewer good targets for investments has led to increased competition and rising asset prices.

“Infrastructure has looked very attractive in a world starved for yield,” said Nacho Rios, a partner in Bain’s Madrid office and lead author of the research. “But the mechanics of risk and asset pricing are shifting. We’re seeing a much greater need for specialization as each country and sector’s needs create unexpected challenges for the uninitiated.”

The Bain research focuses on three key infrastructure areas, power & gas utilities, oil & gas, and transportation, which have accounted for 75 percent of private infrastructure investment in the past five years, and which will continue to dominate future demand scenarios:

• In power & gas utilities, the major utilities in Europe and North America have been unable to sustain the CAPEX needed for future generation needs. The sector is seeing steady unbundling of transmission and distribution of power. Peak prospects for global renewables investments may reach as much as $400 billion per year by 2020; this according to Bloomberg New Energy Finance. But despite increasing share in the energy mix, renewables remain fraught with questions about the impact of regulation and their ability to compete with newly cheap hydrocarbons. Nuclear power remains a viable option for China and India to address energy security and clean energy concerns. East and West Africa offer greenfield opportunities
• In oil & gas, the resurgence of hydrocarbons with heavy LNG demand in Europe and Asia plus the supply shock of shale gas, mostly in North America, all fuel the need for new transportations and storage infrastructure. The global value of LNG projects is currently at $230 billion and rising. In India, the full value chain from refining and gas processing to petrochemicals is underdeveloped. In Africa, opportunities are concentrated in the build-out of large refineries
• In transportation, existing airports, roads, and rail networks all demand significant reinvestment. High-speed rail will continue to rise within advanced economies, as well as privatize across Europe. India and Sub-Saharan Africa are global hotbeds of road and rail network demand

In total, the study finds, infrastructure attractiveness will affect the mix of asset allocations significantly. Currently, the majority (roughly 75 percent) of institutional investors allocate less than five percent of assets under management (AUM) to infrastructure. But target allocations are quickly shifting. Bain expects the majority of investors to allocate five percent or more of AUM to infrastructure in the coming years. Furthermore, the total number of infrastructure funds has already almost tripled in five years. This surge in supply and demand around this asset class creates six new criteria for infrastructure investing in the coming decade.

• The capability to build or develop niche expertise in infrastructure
• Differential access to deals/opportunities, either directly (on-site) or through partnerships
• Discipline to stay in “sweet spot” and avoid over-stretching into risky areas or non-pure infrastructure class assets
• Assessing long term downside risk from areas such as regulation and knowing how to price it correctly
• Capacity to predict CAPEX requirements and take a dynamic perspective of the asset which realizes future opportunities to grow or transform initial configuration
• Skills to actively manage the asset and extract value upside through operational improvement and cash optimization

“These ‘new era’ criteria will widen the gaps between infrastructure funds that excel in delivering returns and those that are tripped up by the risks,” concluded Rios. “This means that as more capital seeks out infrastructure targets, we’ll also see a flight to quality to those funds that widen the gap successfully.”

About Bain & Company, Inc.

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