Equity finance
2.1 As shareholders, equity investors in projects are the owners of the project company that is responsible for delivering the obligations under the contract and for bearing the risks associated with the design, build, financing and management of public infrastructure and services. Equity investors earn a return on their investment over the project's life and are, therefore, incentivised to meet performance requirements and deliver efficiencies to maximise their returns. Equity investors take on the greatest risk since they only earn a return after payments of operational costs and debt loan obligations. Debt finance, ranking senior to equity in the priority order of payments, is serviced by way of fixed interest and principal repayments. Consequently equity investors, while taking more risk, also take the benefit of any upside in project performance as any profits after the repayment of debt obligations can be distributed to equity investors.
2.2 There are different types of equity investors and they can take different roles in relation to the project (Box 2.A).
| Box 2.A: Equity investors By stage of investment: • Primary investors - take a lead role in the development of a project and will often have an interest in the sub-contracting entities. They may choose to hold their investment throughout the life of the project or may sell their equity stake post project completion in order to recycle invested capital into new projects. • Secondary investors - buy an equity stake in an existing project, typically once the construction of the asset is complete. By investor type: • Industry sponsors - usually a primary investor, they will often provide management services to the project company and provide some or all of the construction and/or facilities management and maintenance services. • Financial investors - usually do not have an interest in sub-contracting arrangements. The primary reason for their investment is to maximise returns for their shareholders or fund investors1 over a medium to long-term basis. They may play a role in initial structuring of the project and day-to-day operations or, alternatively, may be a more passive investor. They also may choose to invest in projects from the outset or purchase equity in the secondary market depending on their target return requirements. • Institutional investors (equity) - for example pension funds. These investors are not primarily interested in maximising returns. They typically invest on a long-term basis to earn long-term stable returns to match their maturing liabilities e.g. payments to pension holders. Typically, these types of investors have invested in projects during the operational phase of a project so as not to be exposed to bidding and construction risks. |
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1 Pension funds and other institutional investors often invest in managed funds to access returns generated from investment in infrastructure assets where they are unable to invest directly due to lack of resourcing or expertise.