After passing the COVID test, investors bet on infrastructure to help build immunity to inflation and reach net zero. Richard Lowe reports
Following several years of growing institutional capital flows, during which investors around the world have sought to increase their exposure to infrastructure, came its first serious test since the global financial crisis. In 2020, COVID-19 hit transport sectors hard, but by and large the asset class proved its resilience, avoiding the price volatility of the listed markets and providing stable income. Digital and energy sectors even thrived during the pandemic, and transport even mounted a recovery in 2021.
Heading into the latter half of 2022, the asset class faces a new set of challenges, all of which are interlinked: military conflict in Europe, energy insecurity, rising inflation and interest rates, and a cost-of-living crisis.
On paper, it looks like a perfect storm that could knock the asset class off course. But responses to this year’s survey suggest that both the recent past and immediate future are actually bolstering the case for building up allocations to infrastructure – at least, for most investors.
The survey captures responses from pension funds and other institutional investors generally, including those that invest in infrastructure and those that do not. Around 70% have active allocations to the asset class (figure 1), which is in line with the two previous years. Figure 2 shows that, of those that do not invest, 18% have plans to enter the asset class (down from 21% last year) and 46% may invest in the future (50% in 2021).
When asked to give reasons for investing in infrastructure, key factors were cited repeatedly:
- Secure, stable cashflows;
- Diversification and low correlation with other asset classes;
- Potential to protect against inflation;
- Potential to contribute to net zero and ESG strategies.
For those investors that do not invest in infrastructure, the main reason given was lack of size of the investor, followed by the illiquidity of the asset class (figure 3).
Figure 4 shows that of those investors with infrastructure allocations 58% said performance of the asset class over the past five years had met their expectations, while 42% said it exceeded them.
“We’ve achieved excess returns above our underwritten base case, largely driven by investments in renewable development platforms and rising valuations for infrastructure,” said one investor.
Another reported: “We have exceeded our benchmark each year for the last five years. In the last two years, being impacted by COVID, we have continued to outperform our current benchmark and our portfolio has shown great resiliency.”
As shown in figure 5, most investors (54%) are targeting returns of 8-11% for infrastructure equity (23% are targeting 5-8% and 18% are targeting 11-14%). And it should be noted that most investors (85%) are active in core infrastructure, but half invest in value-add, suggesting a blending of risk profiles in many institutional portfolios (figure 7).
Figure 8 shows that most investors either thought infrastructure had become more attractive over the past two years (46%) or its appeal had remained the same (42%). Asked why it had become more attractive, its recently demonstrated stability and potential to hedge inflation came up.
For example, one respondent referred to its “resilience to crises (ie, COVID-19) and inflation protection”. Another investor said: “The asset class continues to attract more investors every year, especially in the context of climate change and digitalisation stemming from the pandemic. In the context of recent inflation increase and higher interest rates, infrastructure has proven to be resilient to external shocks, therefore making the asset class even more attractive.”
A minority of investors (12%) believe infrastructure had become less attractive, and this appears to be related to pricing and the competitiveness of the market. One investor said: “Pricing of core infrastructure has been keener, meaning prices are high and yields lower. With interest rates rising, it makes it a less attractive proposition.”
However, the survey supports the notion that allocations to institutional infrastructure will continue to rise. Half of investors expect their allocations to rise (figure 9) over the next 18 months and 42% expect to maintain their existing quota. Last year, a greater proportion (61%) expected to increase allocations (36% expected allocations to be stable).
Figure 10 also suggests investors are keen to put capital into the market, with 54% expecting to invest/commit the same amount over the next 12 months, while 23% anticipate increasing the amount.
But there does appear to be a tempering of appetite for new investment compared with last year. Another 23% of investor expect to decrease their levels of investment. Last year this proportion was only 9%, while nearly twice the amount as this year (42%) expected to increase their investment activity. This could be a reflection of investors becoming more selective on new investments as they attempt to price in new risks, such as rising inflation.
Asked specifically about the war in Ukraine, most investors (81%) say the conflict has had no bearing on their infrastructure strategy (figure 11). Those who disagree with this statement cite, for example, the exclusion of “certain regions in Eastern Europe for now” and exposure to gas infrastructure.
But the fallout of the conflict and challenges around energy security will further support institutional investment in clean energy – 92% of investors agree with this position (figure 12).
One investor said: “Given the fact that Europe will have to increase its own energy production, increase energy efficiency and pursue renewable energy alternatives, we believe that there will be more opportunities for institutional investments in clean energy.”
Reasons to invest in infrastructure
“Infrastructure assets provide stable, long-term cashflows and the potential for inflation protection… great diversification due to low correlation to other asset classes.”
“Tangible assets that can generate stable and predictable investment income over the long term while protecting our capital from inflation.”
“It contributes to long-term attractive risk-adjusted returns and increased risk diversification in the overall portfolio. In addition, many infrastructure investments provide the opportunity to contribute to the green transition.”
But investors are less optimistic about Europe’s ability to reach net zero at national levels despite pressure to become less reliant on Russian gas (figure 13). More than half (56%) believe this is possible, but 28% are not sure.
It is not surprising then that the biggest focus when it comes to infrastructure sub-sectors is renewable energy (figure 20). The vast majority of investors have solar (92%) and wind (86%) on their lists for making new investments. The next most popular, at 77%, is fibre networks, followed by data centres (65%), hydro power, battery storage and waste/water (all 62%).
All investors want to invest in Europe (figure 19), with 73% also keen on North America, followed by Asia-Pacific (39%), Latin American (19%) and Africa (4%). Only 35% of investors are investing in what they determine to be emerging markets (figure 14).
Nearly all investors (92%) have a specific ESG strategy for their infrastructure portfolio, but less than half (44%) have net-zero targets in place (figures 15 and 16). The same proportion (44%) are looking to make positive social impact through infrastructure investments, although a further 28% are considering or planning to do so (figure 17).
Top 100 Infrastructure Investors 2022: Survey
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Top 100 Infrastructure Investors 2022: Survey