Core infrastructure investment ‘too good to last
JP Morgan Asset Management describes investment in core infrastructure, which offers both steady income and lower volatility than other asset classes, as too good to last.
The biggest gains will go to early movers likely to enjoy “outsized capital appreciation in the near to mid term”.
JP Morgan portfolio manager Mark Weisdorf, who runs an OECD Infrastructure Equity fund, predicts the investment window will close in the next few years, with discount rates compressing by 100bp or more.
Weisdorf says: “We believe we are rapidly approaching a tipping point, where institutional investors searching for income, frustrated by lacklustre economic growth and dissatisfied with the volatility of public equity markets, will turn to infrastructure in larger numbers and with greater allocations.”
Dramatic growth forecast
That trend is confirmed by Altius Associates, which forecasts allocations to private infrastructure funds will “grow dramatically” over the next decade, either as a standalone asset class, or as part of a broader real assets allocation.
Institutional investors currently have less than 1% allocated to infrastructure, but this could leap to 5%. Reyno Norval, infrastructure specialist at the firm, says governments in the developed world cannot supply the capital required for public infrastructure projects because of large deficits and severe budgetary pressures.
“Increasingly, they are seeking to access private capital to build new assets, expand or renovate existing assets, and supply the provision of essential services.”
Developing markets, meanwhile, need to build to support economic growth. OECD estimates suggest that Asia/Pacific region will need $15.6trn in infrastructure spending, Europe $9.1trn, Latin/South America $7.4trn and North America $6.5trn through to 2030.
Altius Associates acknowledges performance history for infrastructure investments is fairly limited on the listed side, and non-existent for private funds. Total return performance data for the asset class is not yet available, but the best private infrastructure managers are delivering target yields.
Comparing ten-year net returns to end March 2013 of three traditional asset classes (US equity, non-US equity, and global fixed income) and three real asset classes (public energy, listed infrastructure and private energy), real asset classes have outperformed traditional asset classes.
So infrastructure offers attractive returns, some diversification and can act as an inflation hedge.
Long-term positive cashflows tend to mirror the liabilities of many pension funds and insurance companies.
Norval says: “Institutional private infrastructure is a relatively new investment area, although starting to mature. The momentum in the industry was temporarily slowed by the financial crisis, reaching a cyclical low point in 2009. However, infrastructure demand and investment has rebounded, and the outlook is positive.”
Macquarie Funds Group, the asset management arm of Macquarie Group, with some $360bn in assets under management, pioneered infrastructure as an asset class almost 20 years ago and lays claim to be the world’s largest manager of infrastructure, with a growing portfolio in real estate, agriculture and energy investments.
In early May, the €2.75bn final close of its fourth European infrastructure fund took the Macquarie Infrastructure and Real Assets’ (MIRA) to a total of $9.3bn, including new infrastructure funds in Korea, the Philippines and China, and a Mexican Real Estate Investment Trust. Its listed funds have experienced further market capital growth of $2.8bn over the same period.
Macquarie European Infrastructure Fund 4 (MEIF4) closed well above its initial €1.5bn to €2bn target and co-investment arrangements of at least €2bn have been agreed with its investors. It has already committed some €500m to two core, regulated infrastructure assets.
In July 2012, it led the consortium which acquired Open Grid Europe, Germany’s largest gas network, from EOn. The consortium included a number of MEIF 4 investors. In December 2012, it acquired a stake in a Czech gas network from RWE.
“Institutional investors increasingly understand the positive role infrastructure can play in their portfolios. As a result, it is a strongly growing asset class,” says Martin Stanley, global head of MIRA. “Experienced fund managers will have an important role to play in responsibly investing this growing pool of capital in much-needed infrastructure across the globe.”
As the asset class matures, investors are also increasingly rigorous in their manager selection process, focusing on access to investment opportunities, investment strategy and team, ability to add operational value and proven track record.