Tuesday, October 30, 2007

Bidding up Basics: AIG Raises $3.5 Billion for Infrastructure Buyouts

From Bloomberg:
American International Group Inc., the world's biggest insurer, raised $3.5 billion to invest in infrastructure buyouts.

Two-thirds of the money has been committed for investments, AIG Highstar Capital said today in a statement. More than 90 percent came from outside investors, AIG said. The private equity unit has stakes in companies that run power plants, waste treatment facilities and shipping terminals, including Ports America, acquired from Dubai-owned DP World in March.

AIG collects fees to manage private equity and hedge fund investments for clients and also has put $25.5 billion of its own money into the holdings to back insurance policies. Income from the partnerships totaling $2.2 billion through the end of June helped the New York-based company beat analysts' profit forecasts this year. The assets made up 3 percent of the company's $828.8 billion holdings as of June 30.

``Infrastructure investing is a critical component of a successful and diversified alternative investment strategy, given its low correlation with other asset classes,'' Christopher Lee, managing partner of the AIG fund, said in the statement....MORE

From FT Alphaville last week:

Tony Jackson: Infrastructure investors run out of road

Amid the credit chaos, for infrastructure funds it seems to be business as usual.

But, notes Tony Jackson in his Monday column, there are few assets to buy - and a lot of money chasing them.

Collectively, the money raised from investors and not yet spent is estimated at $150bn-$200bn. If the usual leverage is still available on top, the end result could be a bubble.

Premiums have been building over regulated asset value, culminating in 30 per cent-plus for Southern Water. Dieter Helm of Oxford University, argues that the regulators have simply got their sums wrong and investors are making the rational assumption that this will persist indefinitely. The funds use far more debt than a regulator’s standard model allows, so collect a risk premium on non-existent equity.

The rationale for infrastructure investing is powerful, says Jackson. But the snag is political. Infrastructure involves precisely the kind of assets that opponents of privatisation feel most passionate about. And there is a tension between investors’ desire for safe, low returns from infrastructure, which has driven the enormous growth of funds, and what’s on offer. If you build an airport in a developing country, you are taking on construction risk, operating risk, political and regulatory risk, notes Jackson. You have left the world of infrastructure funds for the world of private equity.

The market has got ahead of itself, he concludes:

Some claim that the asset shortage will clear itself in the next couple of years. Good luck. But the bubble is inflating in the meantime. That may be a magnet for some investors these days, but it is not good news for a fledgling industry with a reputation to build.