Drive during rush hour, wait in a crowded airport, turn on the tap, or flip a light switch: On most days, the complex architecture that supports modern life goes unnoticed. As an investment opportunity, however, those things are getting a lot of attention. Over the past few years, billions of dollars in new money began vying for the best pieces of American toll roads, Indian power plants, Australian airports, and a menagerie of hard assets.
First, some big numbers: In the United States alone, the amount of spending needed to keep the country up and running could top $1.6 trillion through 2010, according to Ernst & Young and the Urban Land Institute. Add in the rest of the world, and the opportunity is astounding: The ULI estimates private-sector global spending on such projects could top $1 trillion annually.
To tap that spending, major banks and private equity firms have set up sizable pools of cash to invest in the sector. Some 72 new funds have opened in the past 15 months and are expected to raise some $120 billion in capital, according to research at Stanford University. Growing demand for investment in the sector marks a step forward in making infrastructure an asset class.
For average investors, new infrastructure-themed ETFs are popping up, and the building boom has already turned some ho-hum stocks that build everything from power grids to sewer systems into outperformers. "Opportunities are every where," says Asieh Mansour, chief economist and strategist at Rreef, Deutsche Bank's alternative asset investment arm. "In North America and Western Europe, existing assets require upgrades and renovations. In emerging markets a growing middle class is driving demand for all forms of new infrastructure."
Broadly, the theory behind infrastructure investing goes like this: Costly upfront investments can yield decades of steady, cash-flow-heavy returns—just the sort of thing retiring baby boomers (and their pension funds) will be looking for as income-producing investments become more attractive. Mansour says infrastructure can return 10 to 14 percent over time—a return like a stock's with security like a bond's. Steve Blank, a financing specialist and fellow at the ULI, says that despite weakness in the market lately and tighter credit conditions that hurt highly leveraged infrastructure deals, the trend is set to continue. "It's stable, it's income producing, it's got credit behind it you can analyze. It has too many things that make sense in institutions' eyes," he says.
Take, for example, the Chicago Skyway Toll Bridge System. Leased for 99 years to Australian investment bank Macquarie and Spain's Cintra in a $1.8 billion deal that closed in 2005, the arrangement became the poster child for infrastructure-specific investing in America. The 7.8-mile stretch of road currently pays out $3 on every car that rolls past—a steady source of cash flow that can rise with inflation (the toll was $2.50 last year).
The expectation in such deals is that private firms can squeeze more value out of those properties with better management, while cash-strapped municipalities often get a big chunk of money to fund other projects without being forced to raise taxes. Broadly, such investments have panned out. Macquarie has managed to grow revenues on most of its roads even when traffic declined. It also teamed with Cintra for a $3.8 billion deal for the Indiana Toll Road in 2006.
For most individual investors, however, buying a piece of a road or power plant isn't a viable option. However, there are other ways to invest in infrastructure. Check out ETFs like the brand-new iShares S&P Global Infrastructure Index , or the year-old SPDR FTSE/Macquarie Global Infrastructure 100. Both are heavily weighted to U.S. projects and utilities, with big stakes in a few large European firms like Germany's E.On, Spain's Iberdrola, and French giant Suez.
As for stocks, companies that help maintain or build new projects are among the best ways to gain exposure. Steve Hoedt, an analyst at National City Corp. in Cleveland, likes some of last year's top performers, like Jacobs Engineering, a huge, worldwide conglomerate that engineers and builds everything from pharmaceutical plants to hospitals. It ran up almost 150 percent in 2007, before pulling back earlier this year. The engineering and construction giant stands to benefit from energy investment, plus all sorts of jobs in emerging markets like China and India, where the boom may just be getting started. Refining, environmental cleanup, building chemical plants, and similar projects are adding to a backlog at Jacobs that soared 39 percent in the fourth quarter to $13.6 billion. Even with a pullback to around 72 a share, Hoedt maintains his price target of 115.