The trend in 2017: if you don’t like the news, just say it’s fake. Further to the article EDHEC infra pleads for watchdog intervention on ‘fake infra’, published on 11 October, it appears this approach has crept into the investing world too.
With the tremendous demand for infrastructure investment strategies, there has been much debate over the relative merits of investing through private or public markets. We’ve heard many of these argument before – 25 years ago with commercial real estate. Today, many institutions globally employ both listed and private real estate to complement each other. So why not infrastructure?
For context, let’s look at the current infrastructure investment landscape.
Over the past several years, investors have poured hundreds of billions of dollars into funds promising access to toll roads, airports, power transmission and other infrastructure assets, hoping to capitalise on the enormous need for private infrastructure funding. Yet much of this capital remains idle, as private equity managers are often finding it easier to raise money for an idea than put it to work in a market of finite opportunities.
Infrastructure data provider Preqin estimates that as of June 2017, private equity managers targeting infrastructure had $150 billion in dry powder. Where private investments have been made, they are often changing hands at significant premiums to listed market valuations, due in part to the imbalance of capital available relative to the projects for sale. As they have in the past, we expect some of these managers will look at listed infrastructure companies as potential acquisition targets. In our view, these managers clearly consider the assets owned by listed infrastructure companies as appropriate for their clients’ objectives.
Meanwhile, more investors are looking to the listed market as a means of implementing a global infrastructure allocation, both standalone and to complement private infrastructure. Through 2016, global assets under management in listed infrastructure strategies reached $86 billion, up from $20 billion in 2011.
In our view, infrastructure should not be defined by its ownership vehicle, or wrapper, but by a specific set of assets and regulated or concession-based structures. We believe a good example is the FTSE Global Core Infrastructure 50/50 Index.
The FTSE index consists only of companies that own and operate core infrastructure assets, which should prevent dilution of infrastructure characteristics that may occur in a more broadly defined sample set – for example, one that simply relies on standard industry classification codes. Furthermore, compared with other listed infrastructure indices (and many private infrastructure funds), the FTSE index is diversified across utilities, transportation and commercial infrastructure, with no outsized regional concentrations.
From its inception at the end of 2009 to the end of June 2017, the index had an annualised return of 9.9 percent compared with 9.1 percent for the MSCI World Index, with volatility 270 basis points lower and 50 percent downside capture. Moreover, correlations remain low relative to bonds and have generally returned to pre-financial crisis levels relative to equities, consistent with other infrastructure indices before the financial crisis. In our view, those are distinguishing characteristics.
To us, arguing over whether listed or private infrastructure is better misses the point.
Both vehicles can offer attractive features, providing investors access to long-lived assets in generally monopolistic industries that have historically generated relatively predictable cash flows, often linked to inflation.
Furthermore, we believe both listed and private vehicles will be vital to raising the tens of trillions of dollars needed in the coming decade to finance critical infrastructure improvements. That should create opportunities for attractive returns in both markets.
We have already seen the potential for capital formation in listed markets with commercial real estate. Since the start of the modern REIT era in 1991, the global real estate securities market has grown from a $100 billion market cap to roughly $2 trillion today. From a time when the vast majority of institutional real estate allocations targeted private investments, listed real estate is now widely recognised as an effective way to allocate to real estate and is utilised in both institutional and individual portfolios globally.
Similar to real estate, we expect listed infrastructure will continue to gain share in investor portfolios based on its attractive investment characteristics and the ability to efficiently implement globally diversified portfolios.
Several factors may ultimately guide an investor to a private or listed allocation, including liquidity budgets, yield and total-return targets, leverage tolerance and risk appetite. Also, investors may want access to infrastructure themes that may only be available in either the listed or private market.
Such considerations are reasonable, in our view – arguments over real and fake infrastructure are not.
Benjamin Morton is portfolio manager, global listed infrastructure at Cohen & Steers.