Disappointment looms in “crowded core space”

Swiss-based Partners Group reckons high valuations in segments such as regulated utilities and brownfield yielding assets is capping equity returns at or below 8%.

Robust appetite for private infrastructure amid investors’ continuing clamour for yield is pushing valuations to “record levels”, according to private fund manager Partners Group.

In a report released yesterday, the firm states that buyers’ interest in what they deem high-quality, long-term assets in a context of low interest rates is holding underwritten equity returns at or below 8 percent.

Noting that valuations are cyclical over time – and that periods of rising interest rates have traditionally coincided with falling multiples – the company warned of a possible return to the mean in the near future that would catch over-enthusiastic buyers by surprise.

“We continue to believe that a certain mean reversion should be expected over the medium term, which leads us to be very cautious in evaluating highly competitive large-cap core transactions, such as regulated utilities or brownfield yielding assets in developed countries.”

But there was a silver lining, the company said, as the current environment was also one when would-be sellers thought it timely to put some attractive assets on the block. It cited the example of Porterbrook, a UK rail leasing company that saw intense bidding prior to its sale at a “high valuation” last October.

Among the areas singled out as promising by the firm are Australian social infrastructure, with the caveat that upcoming elections in the country’s most populous states may reduce the pipeline of fresh public-private partnerships (PPPs) in the coming six to 12 months.

American midstream infrastructure, conventional power in the US and the UK, and communications infrastructure were also seen as sectors potentially worth exploring to find assets yielding a risk premium, presenting scaling-up opportunities or offering access to fast-growing markets.

The firm was relatively downbeat on the UK water sector, largely due to regulatory changes it deemed likely to lead to higher return volatility. It also expressed caution about GDP-linked transport assets – but said it was currently looking at airports “with very cautious growth assumptions, but strong underlying fundamentals and/or limited direct impact from passenger volumes”.

It noted that the European core infrastructure segment was probably best accessed through buying existing portfolios on the secondaries market.

“Deal flow has remained steady as banks and insurance companies continue to divest illiquid assets driven by regulatory requirements,” it concluded. “Tail-end secondaries are very well-positioned to profit from the current attractive exit environment.”