The global infrastructure market has entered a “dramatically different era” in recent years, investment consultancy Bfinance has said in a new report.
Dubbing the current climate as “Infrastructure 3.0”, the firm has detailed the challenges and opportunities presented by a market hit by lower returns, higher prices and increasing strategy drift.
Bfinance urged investors to be inquisitive of their infrastructure managers and ask if assets are being overpriced, if the fund size is too large or where deals might sit within the “infrastructure bucket”. The new approaches being adopted by some managers is presenting a “markedly different phase” for the market from the picture immediately after the global financial crisis.
The firm cited an example of an unnamed Canadian foundation which had concerns over its preferred North American fund manager’s valuation of assets. The scenario led to a detailed analysis before concluding discipline was in place despite high market prices.
However, Guy Hopgood, senior private markets associate at Bfinance, warned investors that “headline claims” around sourcing of bids by managers “should always be challenged”, with some managers possessing a tendency to inflate the level to which deals were sourced bilaterally or “off-market”.
Additionally, with returns for core infrastructure coming closer to between 4 percent and 7 percent, as opposed to the 6 percent and 9 percent range post-crisis, Bfinance noted investors have “proliferated” sectors, such as renewables infrastructure, previously regarded as a more niche area. Yet, with subsidies in western Europe beginning to slow down, returns have been compressed to “bond-like” levels in more mature markets. The consultancy urged investors to explore the broader aspects of these markets, such as energy storage and generation capacity – areas in which the managers still held expertise and could generate higher returns.
Nevertheless, Anish Butani, Bfinance’s infrastructure specialist, cautioned against letting infrastructure investments become “private equity by another name” as further risk is taken on.
“As managers move up the risk spectrum towards core-plus and value-add strategies, investors should consider whether the risks associated with them are consistent with the overall objectives of their infrastructure programme,” he said. “Core infrastructure – regulated utilities and social infrastructure contracts – can still play an important role, despite the decline in available opportunities. Boring may still be beautiful, even though returns will be unlikely to reach double digits.”