Surveys are notoriously misleading these days – just ask those pollsters who predicted President Hillary Clinton and Britain remaining in the EU. But when Probitas Partners’ annual survey noted that most respondents have gone from wanting to increase their exposure to infrastructure, to being happy with it remaining the same, it was worth taking notice.
The survey gained added weight after the placement agent told us that, while this is not the first year most of those surveyed said they would not increase their infrastructure allocations, it has not seen investors signalling caution about the asset class in this way since the years following the global financial crisis.
Their top worry remains the same as last year’s, with 68 percent of investors expressing concern about too much new money flowing into the asset class and the impact that will have on future returns. But a significantly higher number of respondents this year – 62 percent versus 34 percent in 2016 – are also worried that the market is at or near the top of the cycle.
Considering that’s what’s on their minds, it’s not surprising to hear they’ve decided against increasing their allocations to the asset class. Lest we be accused of being overly pessimistic, it’s worth noting that only 6 percent of respondents told Probitas they actually plan to decrease their exposure to infrastructure.
There’s also an obvious, but important, caveat: Probitas’s poll, as well-regarded as it is, is only one snapshot, taking in the opinions of 40 respondents, mostly made up of institutional investors in North America (50 percent) and Western Europe and the UK (23 percent).
The day after we published its results, for example, we received a message from EDHECInfrastructure director Frederic Blanc-Brude alerting us that a survey of asset owners conducted by the think tank and the G20’s Global Infrastructure Hub – to be published 18 September – “finds rather the opposite”.
Still, the types of concerns reported in the Probitas survey are not unique to it. In fact, it took only a few days for consultancy bfinance, which has been involved in more than $600 million of manager selection mandates in the first half of this year alone, to publish another piece of research that highlighted – brace yourselves – more investor concerns.
Heralding that infrastructure investing has “entered a dramatically different era” marked by lower returns and higher risk-taking, bfinance noted that “allocators are increasingly asking whether their manager is overpaying for assets, whether certain funds are too large for their intended strategies, whether an appropriate premium is still available for illiquidity and how much greenfield or non-OECD exposure is appropriate”.
The message coming out loud and clear from these two reports, then, is that not only are investors worried about the asset class, they are very much right to be worried and, potentially, should do some more worrying in the current environment.
It’s hard to disagree. This is a time for assumptions to be questioned and for investors to think long and hard about relative value, particularly in developed markets. For example, with core OECD equity returns compressing to as low as 4 percent, would investors be better served, from a risk-return perspective, by switching to junior debt? Or by increasing their exposure to greenfield? Or maybe they should be considering select emerging-market opportunities, backed by committed governments and underpinned by strong consumer demand?
The answers will, of course, vary individually. But while there are plenty of variables outside managers’ control (infrastructure’s persistent supply-demand imbalance and the current ‘lower for longer’ environment come to mind), it’s also up to them to show investors that they understand – and have solutions for – their concerns.
Otherwise, the cooling-off recorded in this year’s Probitas survey might evolve into a more permanent chill.