The meteoric rise of infrastructure funds in recent times has resulted in a tripling of private investment in infrastructure in Europe over the past year, a newDeloitte study has found.

Private sector investment in infrastructure assets in Europe has now hit €20 billion ($29 billion), reflecting, in Deloitte’s view, that infrastructure has now clearly come to be seen as a separate and distinct asset class within the alternatives space. 

Having surveyed some 30 fund managers across Europe, Deloitte found that most funds are planning to focus their investment activities towards the transport and energy sectors with a preference for roads, rail, airports and ports, regulated gas, electricity and water utility assets. PPP/PFI infrastructure assets, meanwhile, remain more the preserve of specialist funds.

In assessing the future path of the sector, Deloitte believes that infrastructure fund managers are now at an inflection point with what it calls a “distinct market evolution” taking place.

“The infrastructure funds market has developed to be less reliant on highly leveraged structures for its returns. Rather the market has almost uniformly as a sector shifted focus back to core infrastructure assets that can deliver the stable secure long term cash flows desired by their traditional pension fund investors,” said James Riddell, infrastructure funds partner at Deloitte.

“The start of 2008 saw a clear road ahead for infrastructure fund managers, now there is a fork in the road, where investors and fund performance will ultimately direct which path the fund managers will take. The best fund managers will lead the growth in private sector infrastructure investment and head a smaller pool of active fund managers than exists today by virtue of their ability to raise multiple funds and deliver superior returns for their investors.”

Meanwhile, the firm predicts sector consolidation as fund managers who find it hard to raise new funds become specialist asset managers and wind up struggling vehicles.

In looking at other likely trends over the next three to five years, Riddell predicts that some funds may have to restructure, but that there is little risk of widespread defaults.

“There are a handful of demand-exposed assets, where the combination of ongoing poor operational performance, optimistic growth assumptions not being achieved, together with highly leveraged acquisition structures will result in some restructuring taking place as debt packages come up for maturity and refinancing. In some cases, infrastructure funds may have to make capital calls to facilitate equity injections; however, the recent return of the high yield bond market may to some extent mitigate this risk. Generally, we do not see infrastructure portfolios giving rise to many defaults,” he said.

“The debt markets have reopened for business in respect of quality assets. Terms and pricing will likely remain tight for the next few years and there will be no significant shift in the current balance between demand for debt from the infrastructure funds and appetite to lend from the banks.”