Infrastructure Services

INFRASTRUCTURE appears to be the word of the moment. Mentions of the term in major news and business publications in 2007 were up 210% since 1997. And for good reason.

The confluence of four great trends during our lifetimes is driving this growth. First, per capita living standards on a global basis are projected to increase at historically unprecedented rates over the coming decades. Second, the world’s population is going through what may be its final adolescent ‘growth spurt’, adding another two to three billion heads before plateauing for the foreseeable far future in the nine billion range sometime after 2050, according to the U.N.’s demographers. Third, the greatest migration in human history is underway as billions of individuals worldwide decamp from rural communities to seek better lives in urban centers. Just over a year ago, the world reached a crucial milestone for the urban-rural divide: over half of the human population now lives in cities. By 2030, we will reach another milestone, when over half of the global population will live in emerging nation cities such as Dhaka, Mumbai, and São Paolo (all three of which will eclipse New York City in size within a decade). And fourth, globalization has led to integration of the world economy, leading to an unprecedented movement of goods, as well as capital, knowledge, and people, throughout most of the globe.

The combination of these four trends – rising affluence, a growth spurt, mass migration, and global movement of goods – is placing extraordinary strains on existing physical infrastructure and driving demand for new construction. A report from the American Society of Civil Engineers described the U.S. physical infrastructure base as “crumbling” and suggested $1.6 trillion in spending across five years to restore it to “good condition”. Similar conclusions are emerging in the United Kingdom and other developed economies. In parallel, emerging markets are making and must continue to make massive investments in new infrastructure. India alone requires $450 billion in infrastructure investments by 2012, according to its Finance Minister P. Chidambaram. Tellingly, of the 10 highest buildings in the world, only one, the Sears Tower, is in a developed market – the remaining nine, including the half a mile high Burj Dubai – are in the United Arab Emirates, Taiwan, Malaysia, and China.

As a specific example, consider water. Although two-thirds of the world’s surface is water, 98% of the world’s water is saltwater and 99% of the remainder is inaccessible (either frozen in icecaps or dispersed in the soil). As a result, 25% of the world’s population, or about 1.7 billion people, currently live with physical water scarcity. An additional one billion live near adequate water but lack the economic means to access it. These issues will only compound over time as the four trends mentioned above play out. The contrast between New York and Beijing is stark: New York, with a water infrastructure built over 100 years, draws upon 19 reservoirs over thousands of acres to supply its daily water needs. Beijing, embedded in China’s densely populated eastern provinces and just miles away from its sister megacity Tianjin, cannot afford this luxury and instead relies substantially on groundwater – leading to a projected fall in the water table of at least 50 feet over the next 25 years. The practical implication: well designed infrastructure projects will be essential to store, distribute, and, perhaps most critically over the coming decades, purify and re-use water where it is most needed.

The challenge of infrastructure development is exacerbated in developing economies by a remarkable stagnation in the number of qualified engineering graduates. In the United States, there is a ‘lost generation’ of engineers, so to speak – young adults who choose other paths, increasingly in the social sciences or in business management, rather than core engineering disciplines. In 2005, fewer than one in twenty U.S. college students received a Bachelor’s degree in engineering. The total number of engineering graduates in the U.S., including undergraduate and graduate degree recipients, was 102,000 in 1985 but only 107,000 in 2005, a mere 5% increase against the backdrop of a 25% increase in the nation’s population over two decades. In contrast, across the globe in India and China, the number of engineering graduates continues to increase. As a result, accessing and organizing global talent pools will become even more critical over time.

What does this mean for private equity? Some firms have focused on capitalizing – and owning – physical infrastructure. Often structured as long-term projects with meaningful financial leverage secured by income generating assets, these investments are gaining favor and may yield attractive returns, particularly in emerging markets with rapidly rising demand.

Another approach, which is well aligned with GA’s expertise in technology and services, is to focus on the intellectual property stage of the infrastructure value chain. Every structure needs steel and glass, but without thoughtful mechanical and civil engineering design capabilities these are simply, quite literally, building blocks. Every reservoir dam requires concrete, but without expert assistance in evaluating its environmental impact few projects can muster political support. And every multi-billion dollar national highway, port facility, airport, or urban subway transportation project requires many tons of heavy excavation equipment and thousands of hours of construction contractor time, but without the sophisticated application of computational traffic modeling, one is taking blind guesses either that the new capacity is needed precisely where it is being built (the always risky “if we build it, they will come” school of thought) or, if it is needed, that the planned capacity is adequate to satisfy future demand.

Many of the firms which provide these expert services have long been privately held consultancies owned by a highly fragmented group of employee engineers. As these organizations seek to serve global clients, tap into new sources of engineering talent in Asia, expand into ancillary service lines, and cope with the demographic dislocation of retiring ‘baby boomer’ partners, they are finding that growth equity firms such as General Atlantic can assist them with their transformation into well-capitalized world-class services firm. In this spirit, General Atlantic recently made a substantial minority investment in Trow Associates, one of Canada’s fastest growing engineering services firms. Trow’s almost 2,000 employees include experts across multiple engineering disciplines from mechanical engineering to urban planning to hydrogeology and eco-engineering. A core element of GA’s partnership with Trow will be to drive global expansion of its platform through the exportation of skills and services as well as select acquisitions. We look forward to working closely with Trow’s leadership team to building one of the world’s leading engineering design organizations to meet the global challenges ahead.