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The Lure of Global Infrastructure

Fueled by the explosive growth of emerging markets and the never-ending maintenance curse in developed economies, infrastructure appears poised to be one of the main growth engines in capital markets for the foreseeable future. It represents an attractive opportunity for both the sell and buy sides.

Debt ceilings and political pressures have steadily eroded conventional approaches to public capital formation. Perennially cash-strapped states and municipalities have driven the development of innovative ways to design, build, maintain, operate and finance critical infrastructure improvements. One highly successful innovation is the Public-Private Partnership, or “P3" - a unique hybrid organization which provides a quasi-privatized approach to infrastructure challenges, enabling oversight by a public organization while benefiting from the market-based incentives and efficiencies of a private sector model. P3s have been particularly popular in Europe and Asia, and are gradually gaining legitimacy here in the United States. Notable U.S. P3s include Chicago's Skyway Toll Road, the Indiana Toll Road, Virginia's Pocahontas Parkway, and Texas State Highways 130 121.

Given recent market gyrations and the liquidity crisis in fixed income, we expect that in the near term we will witness a pullback in infrastructure-related deals. Long-term prospects, however, are bright, particularly in light of continued trends in public finance, and the need for pension funds and institutional investors to seek out higher yielding instruments while minimizing risk. A potentially symbiotic relationship exists between infrastructure funding needs and pension liability matching. The recent "repricing of risk" will drive institutions to find low-risk, cash flow-dependable investments and thus will encourage growth in the infrastructure space.

See Infrastructure 2007: A Global Perspective from Ernst & Young.

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