$100bn of investment funds set to engulf British utilities

Investment funds set up to buy utility companies have $100bn (£53bn) at their disposal, an investigation by The Independent on Sunday has uncovered.

Analysts believe that within five years, only a few electricity and water companies will still be listed on the London stock market, as infrastructure funds snap up asset-rich UK groups.

Financial institutions in the UK are currently estimated to have around $30bn of cash in unspent funds. But typically in a takeover, one part of equity is added to three or four parts of debt finance. This leveraging means infrastructure funds can secure takeovers with a combined value of over $100bn.

A senior banker at an investment bank in London, said: "All the UK's remaining water firms will have changed hands by 2007 or 2008. Infrastructure funds are prepared to pay far more than a stock market investor."

After the eye-watering prices paid recently by consortiums of infrastructure investors for Thames Water and Anglian Water, UBS raised its ratings on all public water companies. The bank believes Northumbrian is the next firm likely to be picked off. Pennon Group, Severn Trent, Kelda and United Utilities are also possible bid targets.

And the appetite for infrastructure companies, which used to be regarded as boring safe havens for investors in times of fragile market conditions, is set to increase further. Pension funds, mainly from Australia, and Canada, are eager to own large chunks of Britain's networks of pipes, power stations and ports.

The funds like such companies because they are rich in physical assets and have predictable revenue streams.

Specialist infrastructure investors such as Macquarie, the lead player in the Thames Water consortium, and Babcock & Brown, have attracted billions of pounds in pension fund capital to buy such assets. They also invest beside major funds such as Borealis of Canada, Singapore's GIC. More recently, investors from oil-rich states such as Qatar and Kuwait have moved in.

Bankers estimate that up to 15 infrastructure funds - including Goldman Sachs, which bought Associated British Ports earlier this year - have cash piles averaging between $2bn and $3bn

"Unless the public market changes radically in how it values utilities, [the companies] will continue to disappear," said Cressida Hogg, the head of infra-structure investing at 3i.

The buyout group, part of the consortium that offered £2.25bn for Anglian Water, announced last week that it was setting up a dedicated infrastructure practice after years of ad hoc investing through its private equity business. The only other big UK player is Prudential M&G, the investment arm of the insurance giant.

And takeover deals are not the sole preserve of financial buyers. Spanish electricity generator Iberdrola is in talks to purchase ScottishPower for £12bn. Earlier this year, Spain's Ferrovial paid £10.3bn for London airport operator BAA.

Infrastructure funds hold on to investments for a very long time, 10 years or more, and expect modest returns. This allows them to outbid private equity buyers with shorter investment horizons. "Infrastructure funds", said Ms Hogg, "aren't looking for an exit event."

She added: "The UK government is asking: is this why we really privatised these companies? The water regulator has been public about its preference for having comparability and performance data across different water stocks. So it is looking with pretty mixed views at these groups going into private hands."