As investor demand for infrastructure continues to grow, we see a greater intersection between listed and unlisted markets. Why? Listed infrastructure companies offer exposure to core infrastructure assets which are becoming increasingly scarce in the unlisted market. In addition, listed infrastructure offers investors benefits similar to gaining exposure through the unlisted market. In many cases, the intersection of listed and unlisted infrastructure markets is being initiated by some of the world’s most sophisticated investors, including prominent private equity firms and sovereign wealth funds. The majority of the transactions occur through acquisitions of listed company outstanding shares, privatisations and joint ventures.
In 2015, Global Infrastructure Partners announced the purchase of a 24.9 percent stake in a Spanish listed company, Saeta Yield. Saeta Yield owns contracted or regulated renewable energy assets across Spain that generate stable and predictable cashflows. A more recent example of GIP’s intersection with the listed market is the September 2016 announcement of a $4 billion purchase of a 20 percent stake in Gas Natural, a Spanish stock-exchange listed company. The stake was in shares of the company that trade daily and are available to any other stock market investor. From the press release, GIP chairman Adebayo Ogunlesi says “Gas Natural has an outstanding portfolio of gas and electricity assets that generate strong, stable cashflows”.
GIP is not the only direct infrastructure manager that has been actively seeking exposure through listed companies. Australian-based fund manager IFM Investors acquired shares of the Austrian-listed company Vienna Airport. IFM originally took a 29.9 percent stake in October 2014 and subsequently raised its position by an additional 10 percent in March 2016.
Privatisations and joint ventures are other ways private and public companies have intersected. Over the last two years, Brookfield has acquired US natural gas storage assets from the listed company Crestwood Equity and successfully bid for all the outstanding shares of publicly traded US natural gas storage company, Niska Gas. Other privatisation activity includes the acquisition of Australian listed infrastructure company Asciano. This owner of railroad and marine port assets was acquired by a consortium that includes Canada Pension Plan Investment Board, China Investment Corporation, GIC Private Limited, British Columbia Investment Management Corporation, and the Qatar Investment Authority.
In some other cases, private equity investors have taken a direct stake, typically a minority one, in the underlying assets of listed companies. For example, a stake in a Chilean toll road held by Spanish listed company Abertis was sold to Abu Dhabi Investment Authority and a stake in a Mexican toll road held by Mexican listed company OHL Mexico was sold to IFM.
The intersecting of listed and unlisted markets is clear evidence that savvy institutional investors consider listed infrastructure companies to be a sound way to gain exposure to core infrastructure assets.
The rationale for buying stakes of listed companies and even going so far as to take them private is based on basic supply and demand. First, there remains a significant amount of capital seeking infrastructure assets, which continues to swell alongside increasing allocations to the asset class across the investment community, from sovereign funds to pension funds to high net worth individuals to retail investors.
Second, there is a limited supply of assets available in the marketplace, and with the rising tide of capital, competition for assets is high.
Third, the assets held by listed infrastructure companies are trading at a discount to what the same assets trade at in the private market. The capital flows into the listed market have yet to reflect the same wave of demand that has built up a $146 billion dry-powder pool in the private market.
COMPLETING AN INVESTMENT STRATEGY
We believe investors who have not considered listed infrastructure as an alternative to help them reach their infrastructure allocation should consider the actions of some of the largest investors in this asset class. The intersection of private investors with the listed market will eventually lead to a more efficient market price for listed infrastructure stocks. An allocation to listed infrastructure can potentially provide the following benefits to an investor:
Efficient access and dynamic allocation: The liquidity of listed investing offers investors the ability to scale their allocation to infrastructure up and down while maintaining an underlying position in direct or unlisted fund investments.
Ability to access targeted sectors: The listed market may offer investors the ability to access sectors and assets that are limited in the unlisted market. The listed market offers depth of investment in airports, toll roads and North American regulated utilities, assets and sectors that are highly sought after in the unlisted markets.
Current income: Listed infrastructure investments are underpinned by existing core assets. Hence, the investment offers a strong current income (~3.5 percent) supported by recurring cashflows. Many unlisted funds have J-curve return profiles driven by development that can be complemented by the current income profile of the listed market.
Enhanced diversification and risk management: Investors can diversify by geography, asset type, regulatory exposure, interest rate exposure and political exposure with an investment in listed infrastructure, significantly beyond that provided by a discrete portfolio of unlisted assets or funds.
Arbitrage opportunities: Investors may be able to enhance their overall return by adding listed infrastructure as many of the companies trade at significant discounts to the underlying value of their assets.
Lower fees: Listed strategies have lower fees than unlisted funds, thereby enabling investors to reduce overall costs.