The enigma

The infrastructure asset class lacks standardisation in many respects. For investors, this makes it puzzling.

In the 1949 film “Knock on any Door”, youthful character Nick Romano – standing trial accused of murder – utters the famous words: “Live fast, die young, and have a good-looking corpse”.

This demonstrates that not everyone values maturity. But for those hoping that the infrastructure asset class has a viable long-term future, there was some good news in a recent survey of institutional investors by placement agent Probitas Partners.

It found that 59 percent of institutional investors overall now have a separate portfolio allocation for infrastructure. Among more experienced investors, this figure rises to 74 percent.

This represents swift progress given that, six years ago, the equivalent survey discovered that a mere quarter of investors viewed infrastructure as being worthy of its own allocation. Four out of ten were, at the time, making infrastructure investments from their private equity buckets.

By carving out a specific slice of the portfolio and dedicating it to infrastructure, it implies that investors have taken a view of the long term and decided that infrastructure deserves to take permanent residence. That must give fund managers in the asset class some reassurance.

Nonetheless, the same survey offers other observations that challenge casual assumptions about the asset class’s longevity. Notably, 39 percent of investors canvassed by Probitas had no target allocation to infrastructure. These investors can dip into the asset class and just as easily dip out. They are opportunistic. They are not committed.

Furthermore, there is no universal agreement on how to benchmark infrastructure. One thing is clear: there is a much reduced tendency to favour an absolute return target. Instead, various benchmarks are applied including of an internal proprietary nature as well as those based on inflation indices and publicly traded securities indices. In the words of the survey, “no benchmark is dominant”.

No fund structure is dominant either. “Unlike private equity funds where fund terms have substantially standardised, there remains a broad variety of fund term structures in the infrastructure market,” says the survey. Where there is a constant, it’s something of an oddity: most investors which back funds targeting decades-long concession agreements want the funds to be only 10 years long.

It’s interesting to reflect on past PEI conferences where industry luminaries have repeatedly questioned the applicability of the ten-year fund structure, which is a reminder of infrastructure’s roots within private equity. Pre-Crisis, certain infrastructure funds not only had private equity-like fund structures and terms, they were also as guilty of overpaying and over-leveraging as their leveraged buyout counterparts.

In a way, that form of infrastructure investing really did ‘die young’ – post-Crisis, it became near-impossible to raise infrastructure funds on the same terms as pre-Crisis. But the Probitas survey is a useful reminder that infrastructure 2.0 is not yet very well defined. Put bluntly: many investors don’t yet know whether to commit to it, they don’t quite know how to benchmark it, and they’re not really sure how best to access it.

There’s no doubt that investors remain very interested in infrastructure, which they increasingly see as a distinct area of investment. Equally, infrastructure as an asset class is still at a formative stage and achieving maturity remains a distant prospect.