Alpha will shift back into focus for the rational infrastructure investor. After 11 years of uninterrupted growth, I believe some complacency has crept into investment decision-making and risk/return-based asset allocations.
If we look back, infrastructure was christened the ‘Holy Grail’ by portfolio strategists on the conviction that the asset class was ‘low beta’, providing resilience to negative market moves, and offering an equity premium as the cherry on the cake. Institutional capital piled into the asset class with the primary objective of generating investment yield to plug the hole left by lower yields in their fixed-income portfolios. Higher investor demand in turn pushed valuations upwards, especially in brownfield core infrastructure.
The covid-19 pandemic has put the industry through a harsh test. At a casual glance, the asset class has held up well: even in the midst of a covid-19 lockdown, it is impossible to imagine a world where we will not continue to cook meals, turn on the lights, or run the tap. Infrastructure is essential, and the recent weeks and months have brought this fact squarely back into focus. So, downside resilience has been demonstrated across most infrastructure sectors. But should that be a cause for celebration? Or should investors demand more? I believe they should.
Control investments in private infrastructure allow owners like us to develop long-term strategies and entrepreneurially drive forward value creation for the benefit of our clients over the longer term. This requires a large in-house team and hands-on approach, which really pays off.
For example, we recently locked in a high single-digit return premium on top of the average project-level return achieved by comparable renewable assets when we realised an offshore wind farm. This premium was achieved by converting a fully permitted site into a stable operating asset. Most importantly, we also recruited a capable board and project team. In short, we created a highly yielding, stable core asset with predictable cashflows.
A focus on alpha matters for downside protection as well. Certain infrastructure sectors are now experiencing a downward re-rating due to macro drivers like GDP contraction or market factors such as the oil price crash. Asset-specific alpha drives a bifurcation: in my opinion, it is often the determining factor behind whether an asset is written off or a path to recovery can be charted.
Lastly, and arguably most importantly, a focus on alpha also enables us to better fulfil our fiduciary duty to a broader set of stakeholders. At Partners Group, we are committing to reinvest a portion of achieved value creation for the benefit of our portfolio company employees and other stakeholders via a Stakeholder Benefits Programme. This might be in the form of social or educational initiatives, or through financial incentives such as a profit-sharing programme that gives employees the opportunity to participate in a successful exit. If the wider industry focuses on delivering alpha, it can, and should, afford to step up its game on sharing returns among a wider stakeholder group.