Bet Big On Public Works Project

By Aaron Levitt | February 29, 2012 AAA

As the developed world has grappled with budget and austerity worries, crumbling infrastructure has continued to take a back seat to more "important" matters. However, despite the potential government cuts and set-backs, many analysts believe that vital infrastructure spending will see a major upswing over the next few years. The main reason: privatization. As cash-strapped governments are forced to find new ways to slash ballooning budgets, selling public assets could mean the difference between insolvency or business as usual. For retail investors, betting on these stable cash flows could be a great portfolio play.

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A Growing Number of Private Transactions
Privatizing infrastructure assets and spending could be the wave of the future as governments prepare for lower tax receipts and dwindling public spending. According to the Organization for Economic Co-operation and Development (OECD), in order to keep pace with the world's growing population, governments will need to spend at least $53 trillion on infrastructure projects by 2030. That's no small sum of money, especially when coupled with already stretched public budgets. To that end, the public sector has been turning to the private one for funding and support.

Already, the number of infrastructure-related deals has grown exponentially in the wake of the credit crisis. The California State Teachers' Retirement System (CALSTRS) is the latest to make the jump. The institutional investor recently announced that it shifted nearly $500 million of its giant portfolio into utilities, roads, ports and pipelines across the globe. However, CALSTRS isn't alone with regards to the infrastructure bug. Private equity firm Blackstone Group (NYSE:BX) plans to invest more than $2 billion into Cheniere Partners (NYSE:CQP) in order to help pay for the firms new LNG export facility in Louisiana. A variety of institutional and retail investors have already poured about $700 million into infrastructure investments during 2011 and number of infrastructure-specific funds has doubled since 2008.

However, this is only the start. Analysts estimate that in the wake of the Euro-zone crisis, Europe will privatize more than $13.3 billion worth of infrastructure assets over the next 12 to 18 months. That privatization will continue, potentially growing to around $67 billion over the next four years. Both Greece and Spain have already talked about selling stakes in some utilities, ports and airports by 2015. But, it's not just the developed world that will need help. The emerging world is turning to private investors as well. Kenya is looking to involve private investors in order to fill a $44 billion gap needed to build new infrastructure over the next five to eight years.

SEE: Build Your Portfolio With Infrastructure Investments.

Creating Your Own PPP
For investors, the recent surge of public-to-private infrastructure transactions could be a great opportunity. These sorts of investments generally come with stable returns/inflation-resistant cash flows and could be a great anchor for a portfolio. The SPDR FTSE/Macquarie Global Infrastructure 100 (ARCA:GII) tracks 110 different firms including utility Duke Energy (NYSE:DUK) and pipeline firm TransCanada (NYSE:TRP). The fund assets are pretty global, with more than 50% of its holdings located outside of the United States. Since its inception in 2007, performance for the fund has been roughly flat, but it does yield a approximately 4.5%. For those who want to just focus on the developing world, the iShares S&P Emerging Markets Infrastructure (Nasdaq:EMIF) can be used to make a calculated bet on these nations.

The surge in natural gas activity will not only benefit those firms doing the drilling, but those transporting the fuel as well. For investors, all those pipelines, storage tanks and gathering centers dotting the country could be a great bet. The UBS E-TRACS Alerian MLP Infrastructure ETN (ARCA:MLPI) holds 25 of the largest MLP's related to energy infrastructure sector like Kinder Morgan Energy Partners LP (NYSE:KMP) and currently yields about 5.7%. Likewise, the closed-ended Kayne Anderson Midstream Energy Fund (NYSE:KMF) bets on similar firms, but can be had for roughly a 7% discount to its NAV.

SEE: Exchange Traded Notes - An Alternative To ETFs.

The Bottom Line
As a variety of nations grapple with ballooning budgets and slowing tax receipts, public-to-private infrastructure transactions have become more popular. This has allowed regular retail investors the ability to add a dose of stable dividends and cash flows to anchor portfolios. The previous picks, along with the Brookfield Global Listed Infrastructure (NYSE:INF), make ideal ways to play the trend.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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