There is a “fundamental disconnect” between infrastructure asset valuations and their inherent risks, Partners Group has warned in its latest market outlook report.
Buyers’ low return expectations and the industry’s willingness to underwrite “relatively aggressive” business assumptions are causing the divide, the Swiss investment firm said.
This strategy “accentuates the fundamental disconnect between asset valuations and the business, regulatory, or macroeconomic risks inherent in an infrastructure asset”. Partners Group added that large valuations were unable to guard against adverse regulatory effects, particularly in core infrastructure, and the group remained steadfastly confident in its value-creation strategy.
The firm typically invests in assets where it can make add-on acquisitions or build a project pipeline. In the report, Partners Group highlighted the potential for a pan-Asian data infrastructure centre platform strategy, adding that almost one-third of its direct infrastructure investments in the last three years had been made in platform investments.
Energy, renewables and communications infrastructure are set to be the mainstays of Partners Group’s future strategy, as they offer “potential for consolidation [and] … transformative growth”. As of the end of March, eight of the nine investments made by the Partners Group Direct Infrastructure 2015 fund had been in those areas. The firm sees communications infrastructure most attractive in Europe, but bemoaned a compression in returns from renewables on the continent, compared with Asia and other emerging markets.
The report echoed concerns raised by the group in May when chairman Peter Wuffli said “prices across asset classes have reached unusually high levels”. Some UK pension funds had expressed worries over the speed of deployment of the group’s 2012 infrastructure fund, although Paul Finbow, corporate finance specialist at the Suffolk County Council Pension Fund, told Infrastructure Investor at the time that it was a matter of “trying to find the right opportunities and not just getting the money in the ground”.