Pessimists were in short supply at the 500-strong gathering of industry practitioners at our Berlin Summit 2013. And that’s no surprise. After all, some were talking of Canadian pensions increasing their allocations from mid-20 percent to mid-30 percent in the near future. Ok, it’s recognised that Canadians such as BCIMC and La Caisse are somewhat ahead of the game – but there was excited talk of investors in the US and Asia, as well as sovereign wealth funds around the world, playing a determined game of catch-up.
Delegates were reminded of the main reason why. With interest rates at such low levels, there is a natural migration from fixed income as investors seek better yield and returns. In the past, the natural migration point may have been equities, but equities are displaying a degree of volatility that has tendency to unnerve investors. Indeed, those with an already-high equities exposure are also tempted by infrastructure as a way of de-risking their portfolios.
Ok, infrastructure allocations have a way to go yet to prove the rather neat theory of portfolio adjustment. Mark Weisdorf
of JP Morgan Asset management, one of our panellists in Berlin, should have felt vindicated by all the talk of infrastructure’s coming of age. Arguably no-one, after all, has made bolder claims about its potential than Weisdorf over the years. When one of his fellow panellists spoke of “the beginnings of a major asset class”, the canny Weisdorf was probably smiling and nodding in agreement (though it was hard to tell from near the back of the room).
Now, in saying that pessimism was in short supply, that’s not to say the room was full of the easily impressionable (far from it). Along with the optimism, there was realism. It’s acknowledged that there are issues with the pricing of core infrastructure, as elaborated by my colleague Bruno Alves
on p.10. Equally, the point was well made that some institutional investors in infrastructure have benchmarks around the 5 percent mark – in other words, they have something of an in-built buffer for pricing pressure.
There are fears that heightened competition will push some fund managers out of their comfort zones and into riskier areas of investment. Questions persist about the availability of debt finance, despite the exceptionally well attended debt session on day two of the Berlin event and the presence of blue-chip organisations new to the space. And then there’s the thorny issue of political risk – much discussed and fretted over.
Furthermore, there was talk of an imbalance between demand for infrastructure and the scarcity of assets to invest into (“all these people and no deals!” as one industry professional wryly observed between conference sessions). There again, others point to substantial corporate divestment programmes, especially by large utilities such as E.On. Still more reference privatisation possibilities in previously much-maligned Southern Europe (less maligned since Northern Europe started experiencing some of the same problems).
In any case, even should you be in the pessimist camp with the belief that there is a shortage of assets, it’s hard to beat the optimists at the moment. As a breezy individual in Berlin remarked: “Once the capital is there and it’s certain, the deals will flow.” It was an expression of faith that captured the prevailing mood rather nicely.