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FOCUS 16 Investment opportunities


Investors have typically viewed the fi nancial backing of major infrastructure construction as an unattractive risk. Any large projects takes time to complete before it can enter service, and investor preference is currently for something that is operational and yielding. However, I believe we will see the private investment market becoming more comfortable with construction propositions over time.


The real risk here is taken not by the investor but by the construction industry: if a project suffers, it is the construction company that is fi rst in line to foot the bill. So, if construction companies which fully understand the workings of the sector and are happy to manage the associated construction risk on a two to three percent profi t margin, it is surprising investors are unwilling to take it on given the extra return available.


I believe that construction risk is mispriced at the moment and should therefore be a beacon for investors, who are currently in danger of missing out on opportunities due to a lack of appreciation of the nature of this risk.


An M&A boom


The time it takes to complete an infrastructure project has another implication: the ability to expand the supply of these assets is limited and can’t be increased quickly. On the other hand, demand for infrastructure can be expected to signifi cantly outpace supply, thereby pushing up prices, which will have the effect of driving M&A in the sector.


Additionally, a number of infrastructure funds raised in the middle of the last decade are coming towards the end of their ten-year life. This means existing investors will be looking to recycle capital by selling out.


Many of these assets are held through consortium structures, as they are too large for a single investor. In the forthcoming M&A boom, I believe we will see a lot of stake swapping between consortium members. As well as asset swap deals – the bilateral swapping of small stakes – we will see the sale of minority stakes to third parties.


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DEMAND FOR INFRASTRUCTURE CAN BE EXPECTED TO SIGNIFICANTLY OUTPACE SUPPLY


The IPO market for listed infrastructure, particularly around renewables, seems buoyant at the moment and I think that will continue given the recent push for green infrastructure. As that investment comes to fruition, we will see a signifi cant number of listed infrastructure funds emerging.


In summary, I believe that an increasing number of investors will enter the infrastructure market, drawn by its attractive characteristics of low correlation to other asset classes, infl ation protection and the lure of stable returns.


Jonathan White Partner T: +44 (0)20 7311 8977 E: jonathan.white@kpmg.co.uk


Jonathan is a Corporate Finance professional with a specialist knowledge of infrastructure leading KPMG’s M&A and valuation practices. He regularly provides advice on a range of matters to a number of different infrastructure funds. He has spoken on the subject of commercial valuation at various conferences around the world, in the press and has had work published in the UK. He has signifi cant experience of the issuance of public fairness opinions and has acted as an expert witness in both the High Court and in Arbitration proceedings.


© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member fi rm of the KPMG network of independent member fi rms affi liated with KPMG International Cooperative, a Swiss entity. All rights reserved.


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