Non-traditional infrastructure investments’ performance when the next market downturn hits is crucial, but investors are “cautiously optimistic” they could perform similarly to core, Brent Burnett, a managing director at alternative investment management firm Hamilton Lane, told Infrastructure Investor.
Some fund managers that have typically backed core infrastructure assets, which provide investors with long-term steady returns, are increasingly investing in “infrastructure-like” businesses and service providers in the face of increasing competition, he added.
For the time being, non-traditional investments, such as trailer leasing, air conditioner rentals and crematoria businesses may be providing returns similar to what the industry considers typical for the asset class today. But, “we won’t know how much GDP sensitivity they really have until we see them experience a downturn,” Burnett noted.
“The fundamentals today are very good, but that’s because we’re in a strong, high-growth environment,” he added.
According to a private markets overview published by Hamilton Lane, infrastructure returns “have been much more consistent than other sectors, driven by the hallmark characteristics of the asset class including contracted cashflows.”
In 2017 and 2018, infrastructure averaged the highest one-year returns compared to other real assets.
Interest in infrastructure appears to be at an all-time high, with fundraising in 2019 already outpacing last year’s record levels. According to Infrastructure Investor data, 10 funds garnered a total of $22.3 billion between January and April, outpacing the same period in 2018, when $18.78 billion was raised.
The amount of capital moving into the asset class is forcing fund managers to choose between core and core-plus assets which may generate lower returns, and non-traditional investments that are performing well but have little track record when the global economy is not doing well.
“That’s what infrastructure managers are trying to balance today,” Burnett explained. “Do I pay up for a traditional asset that may have a better contract structure, or do I back a non-traditional asset at a much better valuation?”
If fund managers choose the latter, he said, they may try to improve the structure of the investment so cashflows more closely resemble traditional infrastructure characteristics, including structuring longer contracts and diversifying the investment’s revenue stream.
According to Burnett, infrastructure is likely to remain the asset class investors seek for reliable returns.
“We think that, over a long-term period, these are still assets that can provide a lot of benefits to an institutional portfolio,” he said.