Investing in a water desalination plant or a school was seenfor a long time to be a government’s job. Private companieswere usually interested to build such projects, but wererarely excited to own them. If seduced enough, a contractormight proceed to operate and finance them under a long-termcontract. But the general population of equity investors —not to mention the hyper private equiteers — were rarelyexcited about a business as stable as a toll road and neverhad the patience to wait 30 years to realize back theirinvestment.
But suddenly all that changed in 2006. Today infrastructurefunds are one of the hottest asset classes. Globalinvestment in infrastructure is rising exponentially, andglobal financial institutions like Macquarie Bank havediscovered how to convert infrastructure stability to a veryexciting investment. Private equiteers have hopped on thebandwagon, and creatively managed to make an asset classwith meager IRRs of 8-15% produce returns as high as 40%.Through creative financial engineering, private equiteershave pressed to put as little equity as possible and financemost of their investments through debt. Consequently,marginal improvements in asset value due to underestimatingdemand or improved margins significantly boosted the privateequity IRRs.
The developed world has build most of its infrastructureafter World War II, and such infrastructure is now comingtowards the end of its natural life. With most countries inthe developed world experiencing budget deficits, there isno appetite to fork out trillions of dollars over the nextdecade to replace the aging roads, ports, and bridges. TheUS, for example, needs between $2 and 3 trillion alone torehabilitate its road and transportation infrastructure.
On the other hand, the rising needs of the Chinese, theIndians, and other Asians for electricity, water, andtransportation, after decades of being satisfied withhumbler lifestyles, have put enormous stress on theinfrastructure of these countries. China is building in2006-7 more than 200,000 Megawatts of generation capacity —equivalent to the total generation capacity of the UK — ashundreds of millions of Chinese buy TVs, refrigerators, andwashing machines. In total, the World Bank estimates thataround $32 trillion is needed to be invested in the globalinfrastructure between 2005 and 2030.
In the GCC, the demand for capital to finance theinfrastructure needs has never been greater. By the end of2006, the GCC’s announced power, water, energy, real estate,and transportation projects financing requirements wereestimated to be around $723 billion according to MEEDProjects. Add to this amount a rough guesstimate for theunannounced infrastructure needs over the next decade, andit is easy to foresee the total crossing the trillion dollarmark. To put this in perspective, this amount is larger thanthe total GCC banking sector.
Despite the petrodollar windfall, GCC governments areasking the private sector to step in, and this is creatingsignificant opportunities for private equity players. Themost attractive opportunities will come from privatizinginefficient state companies, where private equity playerscan combine operational improvement to creative financialengineering to realize significant returns.
Private equity players will also tap into theinfrastructure boom through investing in the limitedinventory of private companies that design, build, operate,maintain, and finance infrastructure assets. These areprivate companies like Metito for building and runningdesalination plants, Madares for operating schools, and ACWAPower for building IWPPs. I will not be surprised to seestellar demand and exuberant valuation for such companiesfuelled by regional — and increasingly international —investors trying to tap into the upcoming GCC infrastructureboom.
Imad Ghandour is head of Strategy & Research — GulfCapital and Chairman of Information & Statistics Committee —Gulf Venture Capital Association