As governments around the world continue to search for ways to pay for the construction and modernization of essential infrastructure facilities, the demand for resources is rapidly outpacing available capital.
According to a recent report by the McKinsey Global Institute, since the 2008 financial crisis infrastructure investment has actually declined as a share of GDP in 11 of the G20 economies.1 At the same time, McKinsey estimates that as much as $3.3 trillion in economic infrastructure spending is needed annually between now and 2030 just to support current global population growth rates.
The impact of long-term global trends such as population growth, urbanization, and increasing fiscal pressure on governments is widening the gap between infrastructure needs and the investment capital required to meet those needs.
In our view, this gap is likely to continue creating long-term opportunities for investors. The breadth of these opportunities will cut across geographies and industry sectors, with some linked to themes that are more global in nature, while others are driven by specific regional influences that may impact infrastructure assets and projects.
Growing Demand for Technology Infrastructure
The demand for technology infrastructure is one issue that is likely to have broad implications globally. Data usage has exploded as businesses and consumers embrace an expanding mobile environment — a trend that is leading to ongoing and escalating demand for mobile bandwidth.
To put it in perspective, Cisco estimates the number of devices connected to a communications network that uses Internet Protocol (IP) to send and receive messages will total 27.1 billion by 2021 ― more than three times the global population.2 That figure compares with 17.1 billion networked devices in 2016. Traffic from wireless and mobile devices will account for almost two-thirds of all IP traffic by 2021 and is expected to be 3.3 zettabytes (ZB).3
The demand for more data capacity will necessitate continued capital investment by mobile carriers. That, in turn, should support continued growth for tower companies, especially in developing markets, where the technology infrastructure is typically less advanced than in developed markets. Infrastructure companies that own tower networks in emerging markets may benefit from the advancement of wireless networks and the associated demand for towers to support them and mobile users.
Technology also is expected to play a major role in the transportation infrastructure sector. As the global population continues to grow, simply building new roads and adding lanes to existing roads will not be enough to meet the escalating demand. Projects focused on “smarter roads,” such as those built for new developments in autonomous vehicles, could revolutionize transportation infrastructure and how we travel.
Companies that own and operate a high-quality network of toll roads that service key urban corridors could be well-positioned to benefit from advances in smart-road and autonomous-vehicle technologies. For example, Transurban owns roads in its home country of Australia and in the United States that incorporate technologies with automatic incident detection, electronic speed and lane-control signage systems, and dynamic pricing systems that can adjust toll rates based on real-time traffic conditions. The company estimates that autonomous vehicles will improve the efficiency of its roads and potentially increase lane-use capacity by 10%-25% within the next 20 years.
Other Global Infrastructure Investment Trends
In the United States, President Trump has proposed a $1 trillion infrastructure investment plan to be financed by public-private partnerships, including funding from non-U.S. investors. The energy sector in particular is likely to benefit from a more favorable regulatory environment as well as the Trump administration’s acceptance of and support for new pipeline development.
Rapid consolidation in the North American energy infrastructure sector also points to potentially promising opportunities for investors, in our view. Canadian energy companies have led the way in a series of high-profile transactions:
- Enbridge Inc. completed its stock-for-stock merger with Houston-based Spectra Energy in February 2017. The deal created the largest energy infrastructure company in North America, with an enterprise value of about $126 billion.
- Pembina Pipeline Corp. offered to buy Veresen Inc. for $7.1 billion in May 2017. Upon completion of the deal, the combined company will be a major player in the natural gas processing and pipeline infrastructure businesses.
- AltaGas announced plans in January 2017 to buy WGL Holdings, which runs Washington, D.C.’s natural gas utility, for $4.6 billion in cash. WGL shareholders recently approved the deal.
- TransCanada Corp. paid $13 billion to acquire Columbia Pipeline Group in 2016.
We are also starting to see a pickup in consolidation activity in the user-demand space (airports, seaports, toll roads). Recent bids are, in our view, an effort by some of these companies to not only deploy capital at an attractive rate with cheap debt, but also to expand their footprints:
- Italy’s Atlantia bid $18 billion for Spain’s Abertis in May 2017. The deal would create the world’s biggest toll road operator.
- OHL Concesiones, a unit of Spanish construction group OHL, and IFM Global Infrastructure Fund, launched a tender offer for the outstanding stock of OHL Mexico (the Mexican unit of Spanish parent company OHL) in June 2017. The offer reinforces the partnership between OHL and IFM, a global infrastructure fund with more than $62 billion of assets under management, and significant experience in toll road investments across Mexico, the U.S., UK and Australia.
In our opinion, these transactions show that companies across the globe and in a variety of industries recognize the need to position themselves to capitalize on the vast infrastructure investment needs now and in decades to come. We also believe these deals will result in synergies and efficiencies that may create attractive long-term opportunities for investors.
Privatization Gains Momentum
Privatization of existing infrastructure assets, which are more attractive to private investors than new infrastructure projects because of their reliable returns, is another way governments are freeing up finances for infrastructure development projects.
Recent examples from Europe include:
- In July 2016, the Italian government sold a 42.5% stake in state-owned air traffic controller ENAV for $836 million, making it the largest privatization initial public offering (IPO) in the EMEA (Europe, Middle East and Africa) Transport sector since Poste Italiane’s $3.5 billion IPO in October 2015.
- In October 2016, European renewable energy firm Innogy successfully completed a $5.1 billion IPO – the region’s largest in more than five years and Germany’s largest in almost 16 years.
- During 2Q17, new French President Emmanuel Macron’s government looked likely to start a privatization program. Vinci SA, Europe’s largest construction firm, is weighing an offer for a controlling stake in Groupe ADP if the French government decides to privatize the airport operator.
As heavily indebted governments across the globe turn to the private sector to support essential infrastructure investment needs, we believe the demand for capital is likely to remain robust over the long term. As a result, we see meaningful opportunities for investors in global listed infrastructure portfolios.
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- ^Source: “Bridging Global Infrastructure Gaps,” McKinsey Global Institute, June 2016.
- ^Source: “The Zettabyte Era: Trends and Analysis,” Cisco, 6/7/17.
- ^A zettabyte is a unit of data storage capacity that is 2 to the 70th power bytes, also expressed as 10 to the 21st power, or 1 sextillion bytes. Source: “The Zettabyte Era Officially Begins (How Much is That?),” by Thomas Barnett, Jr., Director, Service Provider Thought Leadership, Cisco Systems, 9/9/16.
Oppenheimer Macquarie Global Infrastructure Fund is Sub-Sub-Advised by Macquarie Capital Investment Management LLC. The Fund’s portfolio managers are employed by its Sub-Sub-Adviser, Macquarie Capital Investment Management LLC.
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