Perspectives: LPs remain bullish on infrastructure

Low interest rates, underallocation issues and impressive performance have caused the appetite for the asset class to surge.

The majority of limited partners with existing exposure to infrastructure plan to maintain or increase their commitments in the year ahead. This bullishness reflects solid performance. Less than 10 percent of LPs have been disappointed in the past 12 months, despite a punishing global pandemic, and confidence for the year ahead is even greater.

A protracted low interest rate environment and persistent underallocation issues are helping to bolster investor appetite for infrastructure. LPs are significantly more likely to be underallocated to infrastructure than to have either met or exceeded their allocation targets.

“While some LPs may have momentarily paused commitments during covid, appetite for infrastructure continues to be high, driven by the low interest rate environment and the diversification benefits of the asset class,” says Vittorio Lacagnina, head of business development for private infrastructure at Partners Group. “Infrastructure also offers a quasi-natural hedge against inflation – which may pick up in the long run, considering how much liquidity central banks have injected in the system.”

“Infrastructure has not lost any of its appeal to investors during the pandemic when weighed against other asset classes,” adds Darryl Murphy, managing director at Aviva Investors. “The shock of covid-19 created volatility in the equity markets, leading to a new wave of monetary easing that has suppressed bond yields, and has heightened the appeal of assets with secure, long-term income streams.

“Furthermore, infrastructure as an asset class has, in general, performed well through the pandemic, with the one notable exception of the acute negative impact to transport
demand-based assets such as airports and toll roads. This has validated the resilience of the asset class, which we expect to continue.”

Risk appetite

Core-plus and value-add strategies are the most in favour, with 39 percent and 38 percent of investors, respectively, planning to increase their exposure this year. Super-core was the least in vogue, with 15 percent of respondents planning to grow commitments and 10 percent preparing to cut back.

The crisis does not appear to have caused investors to shy away from the riskier end of the spectrum. “Coming into the crisis, I thought that opportunistic infrastructure strategies might fall completely out of favour and that value-add would be challenged as a result of a renewed focus on core,” says Bruce Chapman, co-founder of Threadmark. “But we have not seen any diminishing appetite for higher risk strategies, which surprised me. I think that is because many opportunistic strategies tend to be heavily weighted towards communications and the energy transition, the two most attractive sectors right now.”

Close to 60 percent of LPs are planning to invest more in the digital sector, and the energy transition has lost none of its momentum as the world grapples with the pandemic. As a result, 55 percent of investors plan to up their exposure to renewables.

LP appetite varies significantly, however, by region. Although more than 30 percent of investors expect to boost their private markets exposure to Asia-Pacific, Western Europe and North America, interest in the frontier markets has slumped. “The reality is that returns in emerging markets tend to be no better, and sometimes worse, than OECD countries, so it doesn’t surprise me that appetite is weak,” says Chapman.

Covid concerns

There are causes for concern in mature markets as well. The US-China trade war may have fallen down the list of challenges keeping private markets investors awake at night, but covid-19 and anticipated recessions in core markets have many market participants rattled.

“Over the next year, we will face challenges in terms of the ongoing impact of covid-19 and the timing and effectiveness of a globally available vaccine, especially within the transport sector,” says Murphy. “We will also need to see the long-term impact of covid on economic growth on a global basis, which may have some effect on infrastructure assets.”

“The longer the crisis goes on, the more assets will be exposed,” adds Allard Ruijs, partner at DIF Capital Partners. “Even if you have the security of long-term contracts, that isn’t going to help if your client goes bankrupt.”

When asked what most threatened infrastructure performance specifically, meanwhile, regulatory risks topped the chart. This was followed by frothy multiples and political instability. “We see strong asset price inflation in a continued environment of low interest rates and continuing capital flow into the asset class as the main challenges,” says Frank Amberg, head of private equity and infrastructure at MEAG. “Our long-term holding period can sustain short-term shocks such as covid-19. However, a regular reassessment of demand patterns, regulatory regimes and the political environment is key.”

“The pandemic has been a useful reminder that infrastructure investments are not risk-free, and that has helped investors recalibrate their perception of risk, including regulatory and political risk,” says InfraRed Capital Partners’ head of investor relations Sandra Lowe. “Overall, though, governments often use infrastructure programmes to anchor economic recovery. Private capital will be needed to support those ambitions, as governments will not be able to fund all programmes, particularly given the debt burden following covid-related spending.”