Friday Letter By invitation only

Infrastructure, it seems, is having a party. In just seven days, the investment world has been filled with headlines of mega fund launches and deals. 

From Goldman Sachs $7.5 billion fund to Lehman Brothers targeting up to $2 billion and 3i Group closing its India-focused infrastructure vehicle on $1.2 billion, the infrastructure asset class is booming. Pension funds especially are clambering to get a piece of the action not least because of infrastructure’s inflation-linked nature.

In 2007 alone, nearly $40 billion was raised for infrastructure funds, according to San Francisco alternative advisory firm Probitas Partners – an 84 percent increase over 2006’s $17.9 billion.

Yet for all the talk of record-breaking fund launches – the title for which looks set to go to Macquarie which is reportedly planning an $11.8 billion vehicle – a cautionary warning has also emerged from professionals at the heart of many infrastructure deals: Politicians and their officials.

An infrastructure investment conference in New York this week saw the US Government Accountability Office warn private investors to come with more than just a large check in hand – they also needed to protect the public interest.

The need to balance maximum returns with demands from the public for desperately needed improvements and better performance is something private equity real estate firms and institutional investors are now facing on a daily basis when considering infrastructure in the public domain.

Canada’s second-largest pension plan, the Canada Pensions Plan Investment Board, faced such a problem when it was told last week the New Zealand government had rejected its application to take a 40 percent stake in Auckland International Airport despite the plan being backed by a majority of shareholders and the board.

The New Zealand government said that deal would be of no particular benefit to the country as a whole, an argument repeatedly being heard from federal, state and local authorities and their elected members in many parts of the world.

But as one US governor warned this week, infrastructure is literally crumbling around our feet taking with it a country’s economic competitiveness and the public’s quality of life.

An unwillingness to invest in strategic infrastructure, he said, had left the US facing a $1.6 trillion bill just to upgrade the existing public assets, let alone build anything new. Public-private partnerships, he went on to say, are the only means the US, and other developed and developing countries, will now meet this looming infrastructure crisis.

Political will is imperative if PPPs are to work. The arguments for and against private investment are, of course, politically-charged for all concerned, but if the public interest is to be protected, sooner or later someone will have to dig into their pocket. Private equity real estate has proved this week it is only eager to help.