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Encouraging Institutional Investment in Greenfield Projects

While infrastructure is rapidly becoming a mainstream asset class, most infrastructure assets only wind up being purchased by institutional investors after they are operational. And this leaves many greenfield projects without a deep pool of investors to draw on...

There’s been lot of talk over the past few weeks about the potential involvement of institutional investors, such as pensions and sovereigns, in the development of new infrastructure projects. For example, one recent project was this tidal one, which is reportedly seeking $39 billion from sovereign funds to get off the ground. Are they going to get it? I hope they do, but they probably won’t.

To date, infrastructure project developers, like the tidal guys, have been largely unsuccessful in enticing institutional investors into the development stage of large infrastructure projects (call these “Greenfield” projects for simplicity). So, while infrastructure is rapidly becoming a mainstream asset class, most infrastructure assets only wind up being purchased by institutional investors after they are operational.

As my loyal readers will no doubt be aware (hi mom!), much of my time at Stanford is spent thinking through the challenges associated with institutional investments in these high-risk, long-term projects. And, with my Stanford colleague Andrew South, I think the main culprit here is uncertainty – not uncertainties within the developers’ organization or from the investors’ interest in these projects but from the infrastructure projects’ own "environments" as represented by the web of stakeholders with an interest in how the project is delivered and managed. Indeed, some early research that Andrew and I have conducted would seem to suggest that political stakeholders often contribute the most uncertainty to project development.

Anyway, whoever is to blame, the result is that the average pension fund or sovereign fund isn't all that interested in Greenfield projects. And that’s a shame, as there are plenty of good reasons why we should encourage institutional investors’ participation in these early stage projects.

Indeed, the advantages of pairing an infrastructure development project with the terminal investor are quite clear from an agency costs perspective. Developers that bring such investment support would have a significant advantage in winning and negotiating new projects. Progressive investors would occupy a unique vantage point early on in an assets’ life from which to analyze, thoroughly understand, and even influence its structure for optimized long-term financial performance. And there are plenty more reasons.

And that’s why Andrew South and I are hoping to resolve a maximum number of the uncertainties woven between the multitudes of infrastructure project stakeholders. In fact, (we hope) this will be one of our big research efforts in the coming few years, and we think the results will produce more opportunities for direct infrastructure investments by the community of institutional infrastructure investors.

Oh, and if you think all this is as important a research project as we do, send me an email. We could probably use your help.

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