In what was a timely reminder of the potential volatility of the stock market, just as our listed infrastructure roundtable drew to a close in July, in came the news of UK foreign secretary Boris Johnson’s resignation from the government. The move pushed the pound down 0.3 percent against the dollar as Prime Minister Theresa May scrambled to keep her government afloat.
We departed AMP Capital’s London office digesting the news, but the firm’s head of global listed infrastructure, Giuseppe Corona, remained, probably reflecting on his comments an hour earlier at the outset of our discussion on how not all volatility is evil.
“I think the volatility in the listed infrastructure market caused by rising interest rates is creating an opportunity and a lot of investors are looking at this now,” he believes. “Twelve months ago, some of the pushback was on valuation, like any infrastructure asset. Now, after this interest rates-related correction, the valuation in the listed infrastructure market is much more supportive.”
Corona’s perception is greeted by a sense of agreement around the table, with our participants having all seen a trajectory of higher-profile investors coming into the listed market.
“The past 12 months or so has really put it into my mind that this asset class is being looked at by those institutional investors as perhaps an alternative to investing directly, which I think is quite a big change for infrastructure investors,” notes Fraser Hughes, chief executive of the Global Listed Infrastructure Organisation.
“I guess maybe they hadn’t had to in the past,” responds David Bentley, partner at Atlas Infrastructure. “They’d had pretty big direct programmes and done a lot of big deals. There’s some really big names in Europe and North America that are starting to sort of think about it quite seriously.”
Bentley’s views are echoed by James Crutcher, senior analyst at CBRE Clarion, who finds investors are being attracted by the liquidity benefits of the market and avoiding some of the return compression.
“One of the big Canadian high-profile direct-market infrastructure pension funds said to us recently that they just can’t ignore the opportunity set of listed infrastructure any longer, knowing that they’re going to be deploying more to infrastructure in the next five to 10 years,” he says.
Evolution of an asset class
The consensus is clear that the past 12 months has seen significant growth in the listed infrastructure market. Yet, our roundtable participants offer varied explanations for what’s driving this. So where is this evolution coming from?
“It’s probably the valuation factor which is pushing [larger investors] more to it at the moment,” argues Crutcher, stressing that different motivations are at play for different types of investors. “There is a big pricing differential. We think on average an 11 times EBITDA multiple for listed is playing maybe 14 to 16 times on the direct side. That’s making quite a compelling argument for big institutions.”
For Bentley, the sparsity of high-quality assets is also a strong factor at play for larger institutions. “You just can’t get them anymore,” he maintains. “When you look at the way the private market has been moving in the past five years in terms of dealflow, it’s now about 50 percent renewable energy. That’s massive. Institutional investors are getting a little frustrated. It’s hard to buy infrastructure. Leaving aside the price, you just can’t get it.”
Hughes also believes investors are choosing to mix the public and the private markets to fill a growing infrastructure allocation.
“I certainly think there’s been a lot more interest from some of the big institutions that are finding difficulty in picking up infrastructure exposure on the direct side,” he says. “So, I think the listed market has come into that mix.”
However, Corona contends that in addition to investors seeking a liquid alternative to private infrastructure, listed infrastructure is part of a more generalist strategy, a move not significantly experienced by Bentley at Atlas.
“My experience talking to investors in the UK is they’re looking at this asset class almost like a stepping stone of their global equities, so they target about 10 percent in listed infrastructure because of its defensive characteristics,” he explains.
Bentley does see a shift beginning to take place with UK investors, although finds they’re still broadly in line with their European counterparts.
“The European pension funds are still very much only taking private-market exposure,” he says. “They’ve much stricter boundaries around the asset allocation, whereas in the US we’re actually starting to see some of these pension funds don’t have to say infrastructure’s just private markets.”
Too many cooks?
The panellists’ view of the market’s growth is exemplified when considering some of those joining it in the past year. The likes of M&G Investments, Legal & General and Bentley’s own outfit Atlas Infrastructure, backed by the partners of Global Infrastructure Partners, have all joined the listed space with fund launches in the past 12 months and Hughes is unabashed in his view of what this means for the reputation and growth of their asset class.
“I think the growth in dedicated listed-infrastructure managers can only be positive for the sector,” he declares. “Fifteen years ago, there were a handful of dedicated listed real estate managers to speak of and they owned less than 5 percent of the listed real estate market. Today, they probably own 25 to 30 percent of that market. They’re the right investors in these companies and my guess is that this industry will grow in the same way.”
Bentley, though, feels the entry of such high-profile investors to the sector could swing either way for those already involved.
“People like M&G or Legal & General, they might raise lots of money or might not, but their presence shows this is a legitimate asset class just in the eyes of investors,” he believes. “I’d say the same with GIP, a highly respected investor, and they’ve actually acknowledged this is a legitimate infrastructure asset class and I think that’s a nice tick of approval and it just brings it to the forefront of people’s minds.
“People need to do it right though. There’s no point just launching a fund and putting one or two guys who are really just equity portfolio managers running a set of screens over a universe. In our view, that’s not how listed infrastructure investing should be done. A few of the firms that have come in, in our view, risk not dedicating the resource that is required to do it properly that that’s actually a genuine risk. It’s all very well having big names backing the asset class but if those big names falter badly in a market correction, it could make us all look bad.”
Crutcher, while somewhat in agreement, sees the concentration of funds as an opportunity for the more established managers in the sector to prove they’re worth their salt.
“At the very least, it has demonstrated there’s a demand for the product,” he maintains. “It also emphasises another characteristic of listed infrastructure which is [that] it lends itself to active management very well. The majority of generalist investors probably don’t look at the private infrastructure market for transaction comparables, and they probably use traditional pricing metrics, which might not be appropriate for listed infrastructure. So those are all good opportunities for us active managers to outperform.”
This means staffing up on people who can understand these wider impacts on the market, according to Corona.
“The implementation of MIFID II can actually increase the price dislocation in the equity markets and, in particular, in this asset class as you need to model these companies extensively and access to sell-side research will likely be more limited,” he says. “You really need to build a strong and deep team to do the research on listed infrastructure and you can’t just do it with a generalist approach.”
In addition to the growth of general listed infrastructure funds, in recent months some outfits have launched listed infrastructure vehicles with additional emphasis on the ESG side of investment. While Hughes sees the ESG theme as “certainly not going away and will increase as a trend in the near future”, some of our other participants are a little more reserved on ESG-dedicated funds.
“Our experience is that investors are pushing us more than ever on ESG issues and they really want to understand how we’re incorporating those factors into our investment process, they really want to drill down and understand it, but they don’t necessarily want a dedicated ESG product, they want to see that we are incorporating it into investment decisions,” says Crutcher.
The introduction of a sustainable fund brings simpler concerns to Bentley. “Given the long lives of infrastructure assets and the importance of the social contract, sustainability is essential to all infrastructure assets,” he states. “I therefore find it hard to understand how one could have an infrastructure fund which is designated as ‘sustainable’. Surely that’s a requirement for any infrastructure fund at its most basic. Having said that, one may choose assets which have lower exposure to carbon pricing to avoid specific risks. I can definitely understand why that may be of interest to investors.”
Much of this issue lies in the various perceptions of what different companies are doing. “A lot of these factors are in the eye of the beholder,” adds Crutcher. “We don’t really include generation companies in our universe but a company that is making a transition from legacy assets to renewables may be doing a lot for the environment, even if it may also still have some non-sustainable assets too.”
Bentley agrees. “If you look at Southern Company, they’ve recently completed a coal-fired power station (albeit one that’s been in construction for many years now) but they’ve also been one of the largest investors in solar in the US and their business is clearly moving in a lower carbon direction,” he expands. “I think it’s important to encourage these management teams to be on the energy transition train.”
Corona similarly believes that pursuing a scoring-based ESG system may be doing investors a disservice. “The risk is that you can actually change the risk-return dynamics of the asset class,” he explains. “If you focus on low-carbon emissions, you may risk missing out investing in transportation and energy assets and you’re basically left with a utilities fund. There’s nothing wrong with that but a utility fund has different risk-reward characteristics than an infrastructure fund and doesn’t have the same GDP sensitivity.”
The shifting nature of many of the companies in the listed universe is posing new questions for our participants and while moves by some utilities or transportation companies may dilute the offering in some cases, the opportunity set is being expanded elsewhere.
“We and other listed infrastructure funds are looking more at data centres than in the past,” says Crutcher. “We wouldn’t include all data centres as infrastructure assets, but depending on the type of asset, the type of customer and the type of lease, a lot of them really are.”
For Bentley, it’s not that the definition of areas of the asset class has changed but rather companies have developed business models more consistent with what he is looking for at Atlas. However, Corona is finding significant flaws with some of these models.
“Transportation companies like Atlantia and Ferrovial think there is value in the construction business because it is getting more competitive to get very attractive returns from brownfield assets. So now the way they think about competing with the big pension plans’ cost-of-capital advantage is actually through greenfield development,” he outlines. “In this way, these companies are moving from pure-play transportation operators to conglomerates with some exposure to construction.”
Here, Bentley agrees and finds the reasons for such moves concerning. “Sometimes companies have gone very far along the value chain and you ask what was the transaction rationale? And they say diversification. Diversification is the number one worst reason to do a transaction. It’s not actually providing shareholders with what they want.”
He continues: “We generally prefer our investee companies to specialise in their sector and geography unless it makes compelling sense to do otherwise. There may be synergies like operational efficiencies, but these are rare. Undertaking M&A just to achieve diversification is a terrible justification. As an investor in a range of assets we, the investor, can achieve diversification. We do not need our investee companies doing it for us and potentially overpaying for assets outside their core business”.
With that in mind, it seems the public and private markets have more in common than they might have thought. What is clear from both markets is that core infrastructure remains in demand.
Around the table
James Crutcher, senior research analyst, CBRE Clarion Securities
Crutcher is a senior research analyst and, as a member of CBRE Clarion Securities’ global infrastructure research team, is responsible for evaluating the listed infrastructure companies in the European region and the transportation sector globally. He joined CBRE Clarion Securities’ predecessor firm in 2006. Prior to that, he worked in various research and analyst positions at ING Real Estate Investment Management and IPD. Crutcher has more than 18 years of financial industry experience.
Giuseppe Corona, head of global listed infrastructure, AMP Capital
Corona leads AMP’s coverage of infrastructure companies and has worked in the Australian firm’s European division since 2012, assuming his current position in 2016. He had spent the previous two years at the Milan offices of Hexane as a senior equity analyst, where he covered multi-utilities and other infrastructure companies. Before that, Corona was a fund manager for Swiss investment firm Swan, which followed a nine-year stint in New York from 1999 to 2008 with Bear Stearns Asset Management. He was appointed a managing director there in 2006 and managed a US-focused value fund and a European long/short hedge fund.
Fraser Hughes, chief executive, Global Listed Infrastructure Organisation
Hughes founded GLIO in 2016, the Brussels-based representative body for the listed infrastructure market. This followed a 16-year stint at the European Public Real Estate Association, 14 of which were spent as a director before Hughes became deputy chief executive. Prior to the EPRA, he spent two years at the Amsterdam branch of Euronext and worked for two years as an analyst at FTSE.
David Bentley, partner, Atlas Infrastructure
Bentley is one of the founding partners of Atlas Infrastructure, a London- and Sydney-based outfit. This followed his role as a portfolio manager with RARE Infrastructure from 2013 to 2016. He previously was an infrastructure investment manager at Future Fund, the Australian government sovereign wealth fund, where he oversaw its investments in listed infrastructure, as well as managing several of the fund’s unlisted infrastructure assets and pooled funds. Bentley also worked as a transaction services manager for PwC on deals involving Thames Water, Alinta and National Grid following a seven-year stint as a manager at EY.