Franklin Templeton Real Assets Advisors’ Joyce Shapiro considers the future of infrastructure investments
Joyce Shapiro, managing director of Infrastructure and Real Resources at Franklin Templeton Real Assets Advisors, suggests the infrastructure theme remains strong across both emerging and developed markets.
There is little doubt that infrastructure, as an asset class, has an exciting future. Not only is there a rapidly growing need for new and/or improved infrastructure in both developed and emerging markets, but also real and growing investor appetite for these assets. Institutional investors, in particular, are realising the benefits and this asset class’ natural fit with their long-term liabilities. Despite a slowdown in recent years due to the global economic crisis, we have seen an influx of infrastructure deals which looks set to continue. At the same time, the number and aggregate volume of private infrastructure funds has grown dramatically in the last five years, in tandem with institutional investors’ increasing interest in accessing the sector directly.
Emerging markets such as China, India and Brazil continue to invest in roads, airports and rail networks as their economies flourish. Even in developed markets, much of the existing infrastructure which has been in place for several decades is nearing the end of its useful life, providing a plethora of new investment opportunities as such facilities are updated. The energy sector alone offers an enormous range of opportunities for infrastructure investors – from renewable energy such as wind and solar farms, to transportation and storage of traditional energy sources like oil and gas. Thanks to the recent shale gas boom, the US is now a net exporter of liquid gas. Utilities such as water, gas and electricity networks also provide interesting opportunities.
Infrastructure spans a huge range of asset types, and this diversification is a large part of its draw for institutional investors. In addition, infrastructure offers the possibility of the much sought-after combination of low volatility and steady yield making it an increasingly important element of investors’ portfolio allocation. Historically, it has offered resilience in periods of economic downturn.
However, while we believe infrastructure offers a good risk/return model, like all investments there are risks to be managed. The demographic shifts involved with the rapid growth taking place in emerging markets are huge, and investing prudently in these markets is challenging.
Clear assessment and understanding of risk at the asset, manager and operator levels is critical. Many projects which require significant level of capital have been organised by newly formed groups that lack proven track records or demonstrated ‘roundtrip’ execution capabilities. These first-time managers are burdened with the due diligence requirements across a broad array of opportunities, some of which are Greenfield in nature and carry their own levels of legal complexity. It is therefore important for institutional investors to either carry out thorough due diligence of their own, and research-driven strategic planning, or employ a manager who is well positioned to do so.