On the search for infrastructure

Investors are not finding the attractive infrastructure investment opportunities they seek for. McKinsey says, they might be looking at the wrong places and gives them three principles to guide their search.

Within the next 15 years, $57 trillion must be invested into infrastructure, says the McKinsey Global Institute. Although this is an enormous sum, there is no shortage of capital. Investors from all over the world are willing to invest in this asset class but have problems to find attractive investment opportunities. McKinsey now underlines in an article, that they might just look at the wrong places and provides the following three guidelines for the search for investment opportunities:

First, McKinsey advises investors to consider emerging markets and greenfield assets. Many investors make the mistake to restrict their investments to OECD members and investment-grade countries or are unwilling to build up infrastructure from scratch (greenfield assets). Due to those restrictions, investments are concentrated in some countries causing high competition for deals. To avoid this competition, investors should invest in emerging markets and adopt a country-by-country risk assessment.

Second, investors should bid for overlooked public assets. Many governments hold cash generating assets or own assets that can be improved and make profitable. “Reforming or privatising state-owned infrastructure presents challenges, of course. An asset may operate at a loss, have a difficult labour situation, or need to be untangled from other businesses unsuitable for privatisation. Despite these complexities, purchasing these assets can yield greater returns from selling assets or turning money-losing assets into profitable ones,” says McKinsey.

Finally, investors should partner up with infrastructure providers. Because governments and businesses are not sharing information excessively, the market is plagued by a lack of information, says the report. If all participants share information in a more structured way, the system would benefit overall. Partnering up with developers can help to evaluate earlier, which projects provide the best economic returns.