Infra investors ‘disregard downside risk’, Partners says

High appetite for private brownfield infrastructure has driven down returns and helped create a “good exit environment”, a new report from Partners Group stated.

In its 2018 outlook, the Swiss management firm warned that competition for investments was pushing down returns and causing investors to seemingly disregard downside risk.

“A recent analysis of the 2017 investment opportunities we put through due diligence shows that, for approximately half of the transactions we ultimately did not transact on, the winning buyer paid a price that implied a return between 200 and 350 [basis points] lower than that we were prepared to accept,” the report noted.

The firm pointed to recent exits, including its stake in a cancer treatment centre in Melbourne. Partners also sold its share in a US solar outfit this week.

The report did note opportunities in select sectors. Communications infrastructure was mentioned across all geographies, including data centres and both terrestrial and sub-sea cables. In North America, energy infrastructure, spurred by the shale revolution, has led the firm to focus on the midstream space. In Europe, offshore wind offers “the most attractive opportunities based on a number of factors, including available investment sizes and expected returns”.

In the Asia-Pacific region, where Partners has developed almost 2GW of renewables capacity, wind and solar remain on the firm’s radar, though the space is viewed as less attractive than it was six months ago.

“As competition from low cost-of-capital buyers for operating assets intensifies, we focus predominantly on capturing the premiums available for building core and select platform expansion opportunities,” the report hedged.

Across the board, Partners plans to focus its attention on greenfield investments.

“Operating core infrastructure is relatively unattractive in all regions due to the continued high valuations attributed to these assets by the market,” the report concluded. “As interest rates in many economies appear to be increasing, we are conscious that assets acquired at very high valuations may not have enough of a built-in buffer to absorb this development, especially as the scope for active value creation is limited in core infrastructure.”