Capitalizing on desire to modernize

Funds invest in infrastructure for a steady revenue stream

August 10, 2008|By Gail MarksJarvis | Gail MarksJarvis,Your Money

Imagine the woods and pastures you used to drive through, or play in, as a child.

Are they overgrown now with housing divisions, shopping centers and office parks? Are they connected to the services residents need by highways, electric lines, water systems and sewer systems?

You have had a glimpse at the tremendous change in infrastructure that comes as more areas of the country become developed. And in areas outside the United States, where prosperity is creating demand for modern sewage systems and turning bicycle riders into car users, the demand for infrastructure is intense.

Merrill Lynch & Co. has estimated that $2.25 trillion will be spent on projects including roads, water treatment plants and airports over the next three years in emerging markets around the world. Data from the Organization for Economic Cooperation and Development has suggested more than $20 trillion in projects will be required over the next 25 years.

And that tremendous push to modernize has not been lost on investors. One of the newest trends in investing is to allocate funds specifically to owning a piece of infrastructure: electric lines, toll roads, water treatment plants, ports or oil storage facilities.

For example, the California Public Employees Retirement System, one of the nation's largest and most innovative pension plans, allocates about 5 percent of the fund to infrastructure investment. The allocation is not viewed as temporary but rather a perpetual slice of the pension fund's overall assets, in the same way that real estate or bonds are used as a constant asset to provide diversification beyond stocks.

California's idea is to invest directly in projects such as owning a piece of a toll road and getting the stream of revenue that comes from cars passing through the pay booths each day, said Farouki Majeed, senior investment manager of Calpers. By owning infrastructure directly, the pension fund intends to earn a return that exceeds inflation while avoiding stock market exposure with that slice of the portfolio.

But most institutions and individuals lack the financial ability to plunk millions of dollars into a project. The common approach used by pension funds and wealthy individuals has been to use one of a number of growing infrastructure funds, which operate like private equity funds.

Australian investment bank Macquarie Group was one of the first players in the area and remains a leader, but with Wall Street looking for alternative, safer forms of profit after the mortgage mess, most investment banks, including Morgan Stanley, Goldman Sachs and UBS, also have entered the arena.

Funds investing in infrastructure projects this year will raise about $30 billion from institutions such as pension funds and wealthy individuals, said Tim Friedman, head of publications for Private Equity Intelligence, an alternative-investment research firm. In a year in which investors are being more careful about selecting investments and investment firms, about $13.1 billion has been raised, Friedman said.

Since 2004, when infrastructure investments started gaining attention, Friedman said, fundraising for infrastructure funds has doubled each year. Last year, $35 billion was raised, and he is anticipating $40 billion to $60 billion a year after this year.

The attraction for investors is the opportunity to invest in fairly stable investments "that are less likely to be influenced by shifts in the global economy," he said.

The idea of investing in infrastructure also has gained attention with the interest recently in privatizing U.S. highways, such as the Chicago Skyway, a 7.8-mile toll bridge connecting the city with neighboring Indiana, said Kim Redding, chief executive of Brookfield Redding LLC, a real estate firm involved with infrastructure investments.

The Chicago Skyway involves a 99-year concession the city of Chicago granted to a private consortium led by Macquarie for $1.8 billion.

Although the slowing global economy could curtail some projects or influence receipts from infrastructure such as airports, toll roads and power lines are typically considered necessities with steady revenue streams.

Friedman said some of the infrastructure funds are suggesting that their returns could range from 10 percent to 20 percent.

As the investing niche develops, outlets for the average investor are developing, too, via the exchange-traded-fund market. The iShares S&P Global Infrastructure Index and the SPDR FTSE/Macquarie Global Infrastructure 100 ETF invest in large infrastructure companies, such as utilities, energy and transportation.

Both have declined sharply this year, with the iShares fund down almost 18 percent and the SPDR down about 10 percent. Unlike the private funds that invest in individual infrastructure projects, the ETFs invest in stocks and are more influenced by the ups and downs in the stock market and the performance of individual companies rather than the cash flow from projects.

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