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Infrastructure asset valuations: An ongoing concern

With concerns regarding infrastructure asset pricing ranking highest among institutional investors surveyed by Preqin, this extract from Preqin Infrastructure Spotlight – August 2015 examines the rise in average infrastructure deal sizes by geography, industry and project stage.

Global average deal size

As an asset class, infrastructure has grown in prominence and significance in recent years, although infrastructure deal flow has fluctuated alongside this. The number of completed infrastructure deals grew rapidly from 733 in 2009 to 1,056 in 2013. However, in 2014 the number of deals tailed off: only 883 deals were completed, with a further 325 completed this year so far. Estimated aggregate deal value followed a similar trajectory to deal flow between 2009 and 2012, although it is yet to surpass the peak in 2012 of USD449 million.

The demand for infrastructure, the increased availability of debt financing, the fact that investors are looking to make more direct investments, and the record levels of dry powder available to fund managers (USD247 billion) have all increased competition for assets within the market, pushing up pricing. The average deal size of an infrastructure asset has increased by 56 per cent since 2013 and now stands at an all-time high of USD626 million for deals completed in 2015 so far. More than 40 per cent of transactions completed this year have been valued at USD500 million or more.

Institutional Investor Concerns

At the beginning of H2 2015, Preqin surveyed institutional investors in infrastructure to find out their thoughts on the key issues for the infrastructure market over the course of the next year. Unsurprisingly, the majority (56 per cent) of these institutions felt that rising valuations were the most important concern, which is reflected in the large proportions of respondents citing deal flow, named by 43 per cent of respondents, and the performance of unlisted vehicles (30 per cent) as key issues (Fig 2).

Regional differences

Average deal size has risen substantially across all regions since 2010, with the average size of North American assets growing by 90 per cent in the period. In the last year, transactions for assets in Europe and North America saw larger rises in average deal size, rising 42 per cent and 13 per cent respectively, while average deal size in Asia and in regions outside North America, Europe and Asia rose only 1 per cent and 2 per cent respectively. This illustrates that the recent rises in valuations are more pronounced across the more developed markets, and less so elsewhere.

Fig 3 shows the rise in average deal sizes since 2010 within some of the more developed infrastructure markets. While the US, Canada and the UK have all experienced substantial increases in average deal size, it is Australian assets that have experienced the most dramatic growth; average deal size now stands at USD761 million, a 158 per cent increase on 2010 and the largest average deal size among those sampled.

Industry

Average deal size has increased across all industries, except healthcare/medical facilities. Generally, utilities-related infrastructure assets have the largest average deal size of assets in any sector, although deals in the transport sector have been largest on average in 2015 so far (USD889 million). Perhaps unsurprisingly, it is the energy industry that has witnessed the most substantial growth in average deal size over more recent years, rising 89 per cent since 2010. Within this sector, renewable energy has become increasingly prominent due to political and economic issues driving the global transition from traditional to alternative energy sources, resulting in a huge increase in the number of transactions completed. In fact, the average size of deals involving renewable energy assets has grown by 118 per cent from USD171 million for deals in 2006, and now stands at USD372 million for deals in 2015 YTD.

Project stage

Institutional investors have typically favoured income-producing brownfield assets for infrastructure investment, with 54 per cent of surveyed investors citing a reliable income stream as one of the key reasons for investing in the asset class. The data suggests that this has caused the pricing of brownfield assets to increase at the fastest rate; since 2010, the average size of deals involving brownfield assets has increased by 148 per cent, while the average size of deals at other stages has increased at approximately half this rate.

A number of notable transactions have been completed in the last 12 months, demonstrating the large ticket sizes investors in infrastructure assets are willing to pay. In March 2015, a consortium consisting of AP-Fonden 1, AP-Fonden 3, Folksam and OMERS acquired Fortum Distribution AB, Fortum’s electricity distribution networks in Sweden, in a deal worth €6.6 billion. Other notable deals include Allianz Capital Partners, Amber Infrastructure Group, Dalmore Capital, DIF and Swiss Life Asset Management’s acquisition of UK-based Thames Tideway Tunnel in a deal worth £4.2 billion, and IFM Investors’ USD5.7 billion purchase of the Indiana Toll Road in March of this year.

Outlook

Investors’ concerns over rising valuations for infrastructure assets appear to be justified; average deal sizes have reached all-time highs in 2015 so far, experiencing year-on-year increases since 2013. However, this growth has not been completely linear across the industry; transactions in the more developed infrastructure markets of North America and Europe, and especially Australia, have seen the largest increases in average deal value, and the appetite for the favourable characteristics of brownfield sites among investors has driven prices for these assets up at a faster rate than infrastructure at both the greenfield and secondary stages. 

What worries investors is that capital committed now may not deliver the strong, stable returns to which they have become accustomed, although only time will tell whether today’s asset prices will have an adverse effect on the overall performance of unlisted infrastructure funds currently investing capital.


This article is taken from Preqin Infrastructure Spotlight – August 2015. Click here to read the full newsletter, which also looks at recent infrastructure fund launches, the Brazilian infrastructure deal environment and the infrastructure debt market.

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