The Rise of a Global Infrastructure Market through Relational Investing

abstract

Infrastructure assets around the world are shifting from public to private ownership. This article investigates how institutional investors are investing beyond their traditional financial and geographic borders and are increasingly serving as owners of infrastructure assets. It shows how infrastructure assets have specific geographies of information embedded in their investment returns and discusses the growing interest of institutional investors in investing in the infrastructure landscape. While infrastructure investments are considered globally, opportunities depend on the availability of specialist information in the region of investment. The article demonstrates that the low-risk, geographically varied returns match the diversification objectives of pension fund portfolios. Relational investing is important in implementing strategies for investing in the infrastructure, since the bidding on and ensuing ownership and management of infrastructure assets around the world require a combination of financial, legal, and technical expertise. The article addresses three distinct economic geography literatures: the geography of finance, pension fund research, and emerging debates on “relational geometries.”

Keywords:

• infrastructure
• institutional investors
• geographies of information
• investment process
• relational investing

Acknowledgments

This research was financed by the British Economic and Social Research Council (PTA-030-2003-00773), the Prins Bernhard Cultuurfonds in Amsterdam, a Talent Scholarship from Nuffic and the Dutch Ministry of Education, and a fieldwork grant from Foreign Affairs Canada and the International Council for Canadian Studies. The assistance of various people (especially the institutional investors in Amsterdam and Toronto who prefer to remain anonymous) in facilitating the fieldwork is appreciated. I am grateful for the constructive comments and suggestions on earlier drafts of the article by Gordon Clark, Erik Swyngedouw, Neil Brenner, Collin McDonald, Laura James, and three anonymous referees. Any errors are, of course, mine.

Notes

1 He was not alone; sociologist Castells (1996) argued that with the rise of electronic means, time and space will be annihilated and capital from all origins is merged in, for example, mutual funds, since it is in constant movement.

2 Equities: between 40 percent and 50 percent, fixed income about 20 percent, and alternatives about 30 percent.

3 Some refer to this rationale for infrastructure pricing as the “Australian finance model,” since the Macquarie Bank was the first to value infrastructure assets this way. This model entails a mixture of equity, bank debt, and taxable revenue debt and has become a widespread model in the past five years, with low inflation and real interest rates.

4 Note that 90 percent of interest is in operating assets owing to the risks involved in greenfields developments, the large amounts of assets coming on the market, and the fact that portfolios cannot take them, since such new construction projects have no income for the first few years. In general, the level of risk may depend on the financial structuring (including the debt-equity mix and hedging policy), construction and development risk (tunnels versus existing roads), the risks of country and exchange rates, and the project’s life cycle. Moreover, the level of information arbitration influences the risk profiles.

5 In contrast, the United States has recently allowed the international ownership of toll roads, such as the Indiana turnpike and the Chicago Skyway, while the heavily publicized controversy over Dubai Ports World evidences resistance to certain foreign ownership.

6 Australia is the leader in this new market because of the delegation of public infrastructure assets to private investors in the early 1990s, owing to the bankruptcy of the state of Victoria.

7 It is interesting that while U.K. pension funds did not contemplate infrastructure as an asset class, many of the Canadian and Australian investments are in the United Kingdom. Therefore, interviews with the investment banks and intermediaries in the United Kingdom were valuable. The interviews with the Australian respondents were conducted in Toronto, London, and by telephone.

8 Some would like to consider infrastructure investing as socially responsible investing (SRI) or economically targeted investing (ETI) as investments are made in formerly public goods. Only 1 of 10 key institutional investors who were involved in infrastructure in 2005 stated that SRI or ETI was a part of their investment rationale.