‘Asset price inflation’, ‘overheating’, ‘bubble’. These are just a few of the terms becoming increasingly associated with the so-called ‘core infrastructure’ space to describe the (perhaps unhealthy?) appetite some investors are demonstrating for these types of quasi-monopolistic, usually regulated, brownfield assets.
Certainly you know there's something in the air when a listed utility like Severn Trent is willing to splash a whopping £19 million (€22 million; $29 million) – about 9 percent of its yearly profits – on a retinue of advisers to fend off a month-long takeover bid, because it thinks the offer price wasn't high enough and it can still get more.
Which is what makes the approach taken over the last 12 months or so by Australia's Industry Funds Management (IFM) so interesting.
As you can read here, IFM has spent the better part of a year lifting its assets under management by 34 percent, mostly on the back of a spate of infrastructure acquisitions. Not core infrastructure acquisitions, mind you, but the type of GDP-correlated assets – namely ports and airports – that were given a bad name by the global financial crisis.
This is IFM, mind you, a relatively conservative fund manager with a low double-digit returns strategy; not a firm such as Global Infrastructure Partners, whose private equity approach to the asset class and high return expectations make it a natural fit for riskier, economically-linked assets.
But as Kyle Mangini, IFM's global head of infrastructure, put it: “Historically, we have targeted regulated assets when they were seen as very stable and boring. More recently, we have been actively acquiring GDP-linked assets, where there is better value.”
Or put another way: IFM is buying against the cycle, taking advantage of all the attention core infrastructure is getting to snap up GDP-linked assets, if not exactly on the cheap, then at least at decent prices.
Why would anyone buy economic infrastructure assets in slow-growing developed countries, though? Part of that answer lies in IFM's faith in the individual characteristics of these assets, its need for portfolio diversification, but also, probably, on an assumption that economies will get better in the near feature.
It's true that IFM is an open-ended fund, which allows it to be patient in ways that 10-year funds simply cannot be. But let's not kid ourselves: by the time the 99-year leases of ports Botany and Kembla wind down, the team that purchased these assets will be long gone, and the economic cycle will have had plenty of ups and downs and lefts and rights.
That is to say, patience alone won't cut it, and IFM is almost certainly not buying these assets to store a in a cellar, letting them age like a fine wine.
All investments are, in a way, bets. But if you have faith that we are in the very early stages of a turning in the economic cycle, then cherry-picking the best GDP-linked assets in a low competitive environment might just be the smartest bet you can place right now.