Euro-investment boom is set to continue

Opportunities for institutions to invest in European infrastructure projects continue to grow rapidly, with the market expanding from €34 billion in 2008 to €88 billion last year


Government policies are pro-infrastructure. For example, the European Union’s Juncker Plan earmarked €315 billion to invest in infrastructure between 2015 and 2017. Many private sector projects continue to benefit from these cash injections.

Meanwhile governments and private investors are responding to wider societal changes around demographics, decarbonisation and digitisation that require major infrastructure upgrades.

For example, a study by the International Energy Agency showed that in the period to 2040, 60 per cent of new electricity generation plant will be renewable. This requires huge changes to the way power networks are managed.

Demographic changes will also be significant. On current trends, more than 60 per cent of the population will be of non-working age by 2040, according to Eurostat. This, together with the changing consumption patterns of millennials, will lead to far-reaching changes in infrastructure demand, from transport to telecommunications.

Many of these changes are being facilitated, or even accelerated, by the rapid advances in digitisation and data. The world’s data is set to grow ten times between 2016 and 2025, according to analyst IDC, requiring significant investment in data infrastructure.

European opportunity

Infrastructure investment opportunities are particularly established in Europe due to the predominant model of private sector funding. In contrast, the United States tends to rely more on public funding and ownership.

Many European projects from toll roads to wind farms offer stable, long-term returns to institutional investors. They create annual yields, often linked to inflation, helping investors to match their liabilities closely.

This makes infrastructure a sought-after alternative to bond investments, especially in the recent environment of low bond yields.

Predictability and low volatility are fundamental features of infrastructure investments, underpinned by high barriers to entry, high customer retention and hard-to-replicate, asset-intensive business models with ownership of large physical assets.

Governance risks

Simon Gray, co-managing partner of Arcus Infrastructure Partners, highlights regulatory change and poor corporate governance as key risks in infrastructure investing. “Regulatory approach and policy direction are important, but changes in regulation are a risk for any business,” he says. “You also need strong governance arrangements in place with, for example, quality management, clear responsibilities, and alignment between business and investors. High-quality motivated people are key to investment success.”

Market segmentation

Arcus’ co-managing partner Ian Harding says there are many projects seeking billions of euros of investment in Europe over the next few years. “The public sector can’t fund it all; it needs private capital,” he says. “Toll roads, utilities, gas grids, rail and many other infrastructure assets are built, owned and run profitably by private companies.”

Mr Harding says the increasing specialisation of infrastructure asset managers is also helping investors. “As the sector evolves, it is segmenting risk-return profiles from different offerings,” he says. “The lowest risk-return is in public-private partnerships and private finance initiatives, but we focus on the higher-return end where we see the most attractive opportunities.

“We focus on three sectors – telecoms, transport and energy – and grow mid-market companies, usually by becoming the majority shareholder. These businesses are dynamic – we need to be nimble. But our team has many years’ experience creating value through good and bad economic times.”

Exciting times

Mr Gray and Mr Harding say it is an exciting time in the asset class as trends such as mobility, high-speed data and smart energy will provide huge opportunities.

“Government policy is mostly conducive to expansion in these areas,” says Mr Gray. “Politicians are still committed to developing green energy. In data, EU policy is to expand broadband access and 5G, for example. In transport, policy is to move towards rail, improve transport corridors and switch from carbon fuels to electricity.

“There is no shortage of opportunity. It comes down to applying your experience to find good assets, allocate time and resources appropriately, and identify and manage the risks.”

For more information about Arcus and European mid-market infrastructure please visit www.arcusip.com