Bfinance has warned that infrastructure investment managers are taking on more risk – and different types of risk – to match past returns.

In a new paper, the investment consultancy argues that the burgeoning asset class has “entered a dramatically different era”, characterised by diminishing returns and a greater diversity of investment options.

The emergence of “Infrastructure 3.0”, as Bfinance terms the new period, is raising new questions for investors.

“As today’s managers take on more risk and different types of risk to try and ensure returns at least match past performance, investors are grappling with an evolving opportunity set,” Bfinance said.

“Allocators are increasingly asking whether their manager is overpaying for assets, whether certain funds are too large for their intended strategies, whether an appropriate premium is still available for illiquidity and how much greenfield or non-OECD exposure is appropriate.

“Expectations for return, risk and diversification characteristics should be based on current market realities, not historical results.”

There has been a significant compression in unlisted infrastructure returns since the post-crisis period. Returns for ‘core’ infrastructure are now approximately 4-7%, down from 6-9%, Bfinance said.

Core-plus infrastructure should now deliver roughly 8-12%, in comparison with 10-15% previously. Value-added infrastructure may be expected to generate returns above 12% – formerly 15% or higher.

Bfinance said it expects appetite for infrastructure to remain strong. It has been involved in investment manager selections for investors worth more than US$600m (€503m) in aggregate.

Anish Butani, infrastructure specialist at Bfinance, said: “While infrastructure has become an increasingly significant component of pension fund, endowment and sovereign wealth fund portfolios over the past decade, investors today face an increasingly challenging and diverse opportunity set.

“With surging deal activity driving down returns, particularly for the most prized core infrastructure assets, infrastructure funds that have traditionally been active in the sector are being pushed to work harder to source the types of deals that will generate the returns that they have enjoyed in the past.

“Indeed, in a lower-for-longer rate environment, the ability of managers to generate alpha is increasingly under the microscope, with investors seeking more clarity on key drivers of performance of predecessor funds.”