Infrastructure financing is a specialized investment discipline that requires uniquely skilled and experienced investment managers.
Attributes of this specialization include:
Infrastructure projects serve either
- large concentrated urban centers or
- large but sparsely populated geographic areas.
In either case, the projects require significant capital expenditures before the effectiveness of the project is tested by the market. It is important to both the project sponsors and investors that the scale and the financing structure of the projects be appropriate to the service territory.
Risk of Failure to Achieve Critical Mass
Infrastructure projects require a high critical mass of monetizable value streams in order to achieve scale. The critical mass demand often takes an extended period to develop including a “ramp up” period. It is important to both the project sponsor and investor that the planned capacities of the projects be ambitious enough to become scalable but modest enough to manage the risk of shortfall of user demand.
Place Specific Projects
Infrastructure can’t be moved to more suitable geographic locations if uneconomical. The project sponsors make the critical strategic decisions that determine success in the planning stage of a project. An experienced investor who has seen thousands of infrastructure projects both succeed and fail can help project sponsors identify the strategic, operating and financing risks and dependencies that project sponsors face before a project is financed and constructed.
Long Investment Horizon
It can take years for an infrastructure project to reach potential and return capital to investors. Given the relatively small number of viable project opportunities and the length of time for them to develop, expertise with extensive knowledge and many years of experience in reviewing and investing in “case studies” informs all stakeholders of the expected value of infrastructure projects. This requires a deep understanding of both the financial and technical elements of the entire Life Cycle, as depicted by this diagram:
Investments in infrastructure projects are commonly “directly placed” with investment funds and don’t enjoy the liquidity of exchange-listing as do many publicly-owned companies. Investments such as these are subject to several unique risks:
- Complex exit alternatives that require business relationships with high yield, special situations and private equity funds
- Mark-to-market valuation requiring experience and strong valuation process in pricing similar securities
- Lack of transparency that requires research processes that thoroughly collect and analyze critical information
If the above risks are appropriately addressed, the investor can earn a “return premium” for investing in unlisted and relatively illiquid securities.