Private equity sees gold mine in potholes
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."
Illinois, which last month rejected a plan to sell its state lottery, has a pension system that is nearly 40 percent underfunded, said state Sen. Bill Brady -- resulting in a shortfall of about $45 billion and causing the state to sell assets to meet required contributions.
"Fiscally it's a devastating position to be in," Brady, a vocal critic of overspending, told Reuters. "We have to meet our cash flow needs. As long as there are assets that can be liquidated and there is no other means, we will have to liquidate those assets."
NEW ASSET CLASS
About a dozen major infrastructure funds, which bankers say are currently raising at least $50 billion of new capital, are eyeing the state-owned assets.
With lenders spooked by credit markets and unwilling to fund the leveraged buyouts that had preoccupied private equity firms for years, lotteries, bridges and toll roads have gained new allure.
Grant Kelley, chief executive of Colony Capital Asia, says the blend of stable and predictable cash flows with potentially above-market returns from financial engineering make infrastructure unique.
But critics have said taxpayers risk getting short-changed under public asset deals and that profit-minded investors are more likely to raise prices for services that are often monopolies. Continued...
