Infrastructure: Steady Growth Ahead
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world is in need of a major infrastructure overhaul from Latin America to Australia and places in between. Trillions upon trillions of dollars need to be dedicated to upgrades and new projects to adequately sustain growing populations and aging structures. Infrastructure is a long-term investment opportunity and the companies, investors and banks that are actively pursuing infra opportunities already are going to experience the benefits for decades to come.
Last week's bridge collapse in northern China only months after construction on the landmark was complete was eerily reminiscent of the fall of one such connector in Minneapolis, Minnesota some five years ago. The US bridge was significantly older, but the more recent destruction of a 330-foot stretch of ramp underscores the dire state of infrastructure not only domestically but around the globe.
Trillions of dollars in investment are needed to adequately build and upgrade even just the US's roadways and waterways as well as bridges and buildings. It's going to take more than just the public sector's involvement to get this done. What's especially troubling about the China bridge collapse - in addition to the deaths it caused - is the fact that the Yangmingtan Bridge had its grand opening only nine months prior, suggesting it was following the most recent construction standards. What does that say for the older structures that are positioned around the region?
Thankfully, public policy is somewhat cognizant of the fact that private investors are going to need to participate in the rebuilding of the world's infrastructure. In the US, places like Indiana and Texas are among the dozens of states that are turning to private investors to help finance projects that traditionally were the domain of public offices. This has opened up the door for institutional as well as individual investors.
Bidding for infra projects among developers and financiers can become fierce. Returns are steady, contracts last for decades, control is shared and risk can be moderate, presuming that all sides get along and no shortcuts are sought, the latter of which appears to have been the case in China. And with the next revolution of infrastructure upon us, the opportunities are ample.
For example, control of the Virginia Port Authority's state port may soon be changing hands away from the current operator Virginia International Terminals. The port is entertaining several bids, including a pair of multi-billion dollar offers from two publicly traded suitors. RREEF, the infrastructure arm of financial institution Deutsche Bank (NYSE: DB) has extended an offer of $3.3 billion while private equity giant Carlyle Group (NASDAQ: CG) offered some $2 billion, according to reports. Another bidder, APM Terminals, has proposed $4 billion over the life of a near 5-decade contract. For whoever wins the contract would be a jewel in a crown of public-private partnerships.
For banks such as Deutsche Bank's RREEF unit, the investment opportunity for infrastructure is huge. In Europe alone, some $3.7 trillion in investment into new infrastructure alone is needed over the next 10 years, according to RREEF. This overhaul will not be possible without the use of bank financing and Deutsche is in a unique position. With $16 billion in assets under management, Deutsche Bank's RREEF infra unit is mature and sure to be a player.
To be fair, over the past year Deutsche has explored shedding its RREEF asset management unit, which also includes real estate assets. When those plans didn't materialize, Deutsche co-CEO Anshu Jain expressed the firm's commitment to the asset management arm identifying the business as core to the bank's operations. As is the case with many financial stocks, however, Deutsche Bank is in the midst of some cost-cutting initiatives including layoffs in its international business. The European bank's stock has fallen nearly 12% year to date.
And infra investors are seemingly flush with cash. In July, Carlyle partnered with rail investor Genesee & Wyoming (NYSE: GWR) by investing $800 million to acquire RailAmerica in a $2 billion transaction. Since that time, Carlyle's stock has climbed nearly 13%.
For its part, Genesee & Wyoming is deeply entrenched in the North American rail system including serving crude oil ports that connect to US and Canadian shale fields, which is where the oil and gas discoveries abound. Genesee & Wyoming is making on a marketing blitz and key executives have made appearances at several US transportation conferences of late including one hosted by Deutsche Bank.
Separately, the KKR Global Infrastructure Investors Fund, which is a part of the larger PE giant KKR Financial Holdings (NYSE: KFN), recently raised some $1 billion to invest across infra, reports indicate. KKR, in addition to Bain Capital, is also eyeing power assets currently owned by Indian infrastructure firm Lanco, which could sell up to a 30% position in its power-gen assets. Buyout firms like KKR that have diversified into niche areas like infrastructure are only broadening their business models and expanding their revenue streams, which can be especially appealing in times like these when the markets are so unpredictable.
Also in the region, GMR Infrastructure is reportedly looking to shed nearly half of its infrastructure projects, worth about $270 million, to pay down debt amid weak economic conditions.
Social infrastructure, which is dedicated of the development of universities and hospitals, for instance, is also taking shape in the US but is more mature in Europe. Developer Balfour Beatty (LSE: BBY) is reportedly the first choice for a US$174 million student housing project at Edinburgh University, a contract that would transpire for some five decades.
Infrastructure truly is a global play. Given the billions of dollars that are being fronted by the private sector and the trillions of dollars that are needed to upgrade our structures, this asset class is around for the long haul, which means it might deserve a slice of the asset allocation pie. In return, investors are helping to write the next chapter of the world's infrastructure story that promises to include steady and attractive returns hopefully bypasses any more collapsing bridges or highway ramps.
GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Brookfield Infrastructure Partners. Motley Fool newsletter services recommend Brookfield Infrastructure Partners and Genesee & Wyoming. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
