Conference Presentation, Panel, Fireside Chat
Investing in Infrastructure: Closing the Trillion-Dollar Gap
- Governments face funding shortages requiring private sector capital to address a projected $50 trillion to $90 trillion infrastructure gap required through 2030, with emerging markets needing $900 billion annually from the private sector to meet sustainable development goals.
- Expected returns in emerging markets range from 15% to 18% in US dollars, with historical IFC equity returns previously achieving 18% to 25%, though some specific strategies in Brazil may target 300 basis points above market averages.
- Infrastructure investments are characterized by downside protection, current income, inflation hedging, and diversification benefits, with expected default rates of 9.3% for US power deals over 30 years compared to 3.1% for project finance deals in Africa.
- Mid-market opportunities defined as enterprises under $1 billion represent 70% of North American infrastructure, while a broader $2.6 trillion pool of capital chases only $156 billion in annual deals.
- Strategic plans include holding assets for 25 years or more, utilizing buy-and-hold strategies to accumulate capital, or active management for five to ten years to optimize performance before selling to passive investors.
- Specific asset transformations involve building a new terminal at London City Airport to capitalize on 10 to 15 years of Heathrow congestion and retrofitting energy systems to improve building efficiency by 25% to 40%.
- Portfolio allocations vary, with one plan maintaining approximately $2.5 billion less in contributions than benefits paid, holding about 10% of assets in a $17 billion direct portfolio managed by 45 in-house staff, while others currently hold less than $1 billion in infrastructure.
- Risks include regulatory and political instability where contracts spanning 25 to 30 years conflict with five-year government election cycles, payment honor issues in emerging markets like Pakistan and the Philippines, and the inability to finance projects in India or Hudson County due to uncompensated risks.
- Investment criteria exclude markets that fail to meet international standards or offer uncompensated risks, while favoring jurisdictions with well-understood rule of law, multilateral backing to prevent defaults, and value dislocations such as those seen in Argentina.
- Market behaviors involve US power plants trading at 25% to 90% of replacement cost, with capital providers taking volume, regulatory, and price pressure risks to deploy funds, while emerging market investors often demand bankable contracts and view sovereign bonds as superior risk compensation in countries like Brazil.
- Future infrastructure needs are driven by urbanization, demographics, technology, and climate change, with specific expectations for increased toll roads in North America and Europe and a shift toward treating water ownership as a political issue that can lead to poor quality if provided free of charge.