Some 35 percent of investors currently say they are underallocated to infrastructure, with 29 percent at target and just 3 percent above their optimum allocation.
“We strongly believe that infrastructure is still in the early days of its development as a separate asset class,” says Allard Ruijs, head of investor relations at DIF Capital Partners. “We believe the increasing appetite for infrastructure is driven by the attractive risk-return characteristics, inflation linkage, stability in valuations and limited correlation to other asset classes. In addition, the illiquidity concerns investors may have with closed-end funds have become less of a concern given the development of an active secondary market.”
Just over half of survey respondents report that their infrastructure portfolios had met or exceeded their benchmarks in 2019. Only 9 percent say they were disappointed by their portfolios’ performance.
“The findings validate the increasing popularity of infrastructure as a key addition to a well-balanced private markets portfolio, given its limited correlation and defensive attributes,” says Vittorio Lacagnina, head of business development, private infrastructure, at Partners Group.
However, Sandra Lowe, who focuses on investor relations and fundraising for InfraRed Capital Partners, cautions that the performance of returns on infrastructure investments when compared with benchmarks tells only half the story. “Equally important is the investment strategy, and therefore the risks faced by investors to generate the returns,” she says. “This is particularly important in highly competitive markets.”
With regard to risk/return profile, the core-plus and value-add segments of the infrastructure market are most popular, with 22 percent and 21 percent of investors, respectively, expecting to increase allocations.
“The increasing appetite for infrastructure is driven by the attractive risk-return characteristics, inflation linkage, stability in valuations and limited correlation to other asset classes”
DIF Capital Partners
“Value-add infrastructure strategies can deliver strong risk-adjusted returns to investors seeking to shift the risk/return balance of their infrastructure portfolios in today’s marketplace,” says George So, managing partner at InstarAGF Asset Management. “With active management and robust alignment of interests, we believe there is a significant opportunity to de-risk or grow mid-market infrastructure businesses to create long-term value for investors.”
Ruijs, however, emphasises the undue stigma around core infrastructure assets, regarded as overpriced by the market. He says, “Although the aggressive pricing may be valid for large, visible, trophy assets, we find that smaller or off-market transactions still provide attractive risk-adjusted returns.
“Given where we are in the economic cycle, in our view it remains smart to retain sufficient exposure to longer-term, contracted assets in the core segment. We strongly believe such core assets will provide much-needed downside protection within a portfolio in a recession scenario.”
Investors are also viewing risk profiles opportunistically, rather than as a core component of proactive portfolio construction. For the less mature infrastructure debt space in particular, more than half of investors are approaching the market opportunistically.
Céline Tercier, head of infrastructure finance at Ostrum, says this is ready to change as smaller institutions seek to enter the infrastructure debt space in a more deliberate manner. “We will see more and more investors entering,” she says. “Today, it is primarily the large institutions that are involved. It is a relatively new asset class and there is a cost to enter it. However, I think, going forward, smaller investors will also seek to gain exposure through asset managers. That will be the next major evolution.”
Emerging markets continue to garner attention from investors. Global Infrastructure Partners is understood to be on the road with a $5 billion debut emerging markets vehicle. Asia-Pacific is the most favoured emerging market for LPs, followed by Latin America and central and eastern Europe. Interest in the Middle East, North and sub-Saharan Africa is more muted.
Regulatory risk followed by frothy markets are investors’ chief concerns when it comes to the performance of their infrastructure assets. Both are cited by more than a third of respondents. Political stability is seen as the most significant risk by 29 percent, followed by the prospect of rising interest rates for 21 percent. Across private markets more broadly, however, the threat of recession is most concerning for investors.
“Value-add infrastructure strategies can deliver strong risk-adjusted returns to investors seeking to shift the risk/return balance of their infrastructure portfolios in today’s marketplace”
InstarAGF Asset Management
“We believe these are valid concerns,” says Ruijs. “Therefore, we always conduct recession scenario tests as part of due diligence to ensure an investment can withstand such scenarios and would also, in such a scenario, be expected to generate an appropriate return.”
Lacagnina adds: “In a heavily contested market for quality assets and a late-stage economic cycle, principal protection is a crucial consideration in the underwriting of new investments. Exit assumptions must recognise the risk of a less seller-friendly environment than is the case today.”
Other concerns cited across the private asset classes include the US–China trade war, extreme market volatility, the impact of foreign exchange rates and government policy shifts. As the definition of infrastructure continues to expand, concerns around strategy drift have also come to the fore.
More than two-thirds of investors say they have experienced occasional examples of managers straying outside their core investment parameters over the past 12 months, although 27 percent say managers have remained disciplined in sticking to their investment thesis.