Private equity sees gold mine in potholes

By Jonathan Keehner

NEW YORK (Reuters) - Private equity firms suddenly short on big buyout targets are revisiting an elusive goal -- the privatization of infrastructure.

The crumbling network of roads, ports and bridges have previously intrigued private equity, but a political backlash derailed a wave of anticipated deals sparked by the Chicago Skyway lease for $2 billion in 2005.

Cash-strapped states might now reconsider their aversion, especially if private equity firms are willing to spend as enthusiastically for infrastructure assets as they were before a credit crunch made public markets unreceptive to them.

"The U.S. is falling apart and needs rebuilding," said Craig Fuehrer, a managing director in the industrials group at Deutsche Bank. "State budgets alone can't handle this."

Infrastructure spending accounted for 3 percent of U.S. gross domestic product from 1950 to 1970, according to a New America Foundation report. Since 1980, that figure has dropped below 2 percent. Citing deficient bridges, overwhelmed airports and shoddy roads, the report finds "a huge accumulated shortfall of needed investment."

The deadly collapse of a Minneapolis bridge this month brought the integrity of U.S. infrastructure to the nation's attention -- and some say the tragedy may ultimately prompt public referendum on the need for privatization.

Governments have struggled to maintain infrastructure while balancing tight budgets and facing potentially onerous obligations as America grays.

"States are motivated to monetize assets," said Evan Ladouceur, Citi's head of gaming investment banking. "There are budget gaps, but also looming are unfunded, vested pension liabilities. These amounts can make annual operating budget shortfalls look insignificant."