An asset on the rise: Infrastructure
Flagging government commitment, rising investor demand, technological innovation and an evolving regulatory landscape are all contributing to the increasing appeal of infrastructure to private investors.
Spanning the risk-return spectrum from lower-risk public-private partnerships in developed economies to more private equity-like (and therefore higher risk) assets in less developed countries, infrastructure investing can play a valuable role in portfolio strategies. Research conducted with intermediaries by investment management firm Foresight Group LLP revealed that 62% of advisers will increase their clients’ allocation to infrastructure over the next three years, an increase from 32% in 2018.
A real plateau?
Since the referendum in the UK there has been a notable influx of capital from Asia, North America and the Middle East, all taking the opportunity to capitalise on the subsequent sterling depreciation. In isolation, such currency strategies are not necessarily a major issue, but they do open the door for the types of investment plays favoured by, say, Korean investors. While relative capital values fall (driven by weaker currency), Korean investors have capitalised on short-term currency boosts to obtain returns on capital investments of 3% to 4%; compared with 1% to 1.5% which is commonplace in their home jurisdiction.
In conjunction with Brexit, foreign investment strategies have certainly played their part in the levels of confidence in UK real assets as a whole. A 2017 survey by the British Property Federation and Grosvenor Britain & Ireland revealed that confidence surrounding the real estate sector’s performance over the following year dropped from 88% to 40%.
For UK institutional investors, such foreign strategies have created a fully-priced home market pushing yields down and values up. This has made capital deployment a tough job for UK-based real asset investors. Non-UK investors have benefited, but as the market settles into a new norm, there will be a focus on stable long-term returns; an attractive aspect of infrastructure investment.
Hitting the mainstream
Previously occupied by major pension and sovereign wealth funds seeking liability-matching yields and inflation protection, infrastructure projects are often income-producing real asset-backed investments that offer attractive returns over the long-term. In many cases, infrastructure investments are dependable, unique assets offering diversification and can transcend political and economic cycles. It is also seen as necessary. McKinsey Global Institute estimates that USD$3.3 trillion must be spent annually to 2030 in order to support expected global rates of growth.
Infrastructure is also benefiting from an increase in funds with substantial capital to deploy. This does not mean more capital is being deployed across the market, just that capital being collected is deployed through larger funds; albeit across a fewer number of funds. For example, Brookfield Asset Management and Global Infrastructure Partners have closed a number of flagship infrastructure funds in recent years, with the latest raising over USD$14bn.
The recent establishment of the Estates and Infrastructure Exchange (EIX) also shows promise for bridging the infrastructure funding gap. The first global exchange to focus exclusively on estates and infrastructure as an asset class, the EIX aims to create liquidity, provide transparency in pricing and improve the analysis of project finance risk for investors.
A familiar alternative
Infrastructure investments often exhibit similar characteristics to both real estate and private equity investments:
Simon Burgess | OCORIAN
Head of Alternative Investments
T: +44 (0)1534 507130