Recent strong growth in allocations and investment appetite might be slowing, but investors are not yet applying the brakes to the asset class. Richard Lowe reports

Over the six years that IPE Real Assets has been tracking the 100 largest infrastructure investors in the world (specifically, pension funds and other institutional asset owners), the aggregate volume of assets held has approximately doubled from US$360m in 2017 to US$772bn today. Infrastructure became an increasingly important and growing part of institutional allocations in the decade that followed the global financial crisis, and the growth of the Top 100 reflects that continued growth in more recent years.

The backdrop to that growth has been an extended period of low interest rates which has encouraged a broad allocation of capital globally to income-producing and diversifying alternatives, such as real estate and infrastructure. In comparison with real estate (an asset class most institutional investors have long been invested in) infrastructure is relatively newer and allocations have started from a lower base.

But recent years have provided a couple of challenging tests for the infrastructure asset class, starting with COVID-19, which had a particularly disruptive effect on transport assets, and followed more recently by sudden and persistent inflation and correspondingly high interest rates.

The prevailing sense in the industry is that infrastructure passed both tests. Certainly, the annual survey by IPE Real Assets of institutional infrastructure investors found that investors held firm with their infrastructure allocations during the pandemic in 2020 and 2021, then last year had even more reason to commit capital to the asset class for its inflation-hedging potential.

According to last year’s survey, 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 (COVID-19) and inflation protection”.

This year’s survey shows that about two thirds (65%) of investors reported that their infrastructure portfolios performed broadly in line with their expectations over the past 12 to 18 months, while 27% said infrastructure had exceeded expectations or outperformed (figure 4).

As for its ability to protect against inflation, more than half (56%) of investors believe their infrastructure investments have provided a hedge, although 41% said it was too early to tell (figure 8). Furthermore, more than two thirds (70%) are confident that infrastructure portfolios will provide a hedge going forward, although 26% are unsure (figure 9).

But is all this feeding through to asset allocation, investment intentions and risk appetite? This year’s survey, when compared with the previous two, suggests a relative moderating of the growth of recent years. This could be due to specific uncertainties in the market today, or it could be a natural slowing after several years of fast growth.

For instance, the proportion of investors that expect to reduce the level of investments and commitments has been rising steadily over the past two years – from 9% in 2021 to 23% in 2022 and 26% this year (figure 5). Meanwhile, the proportion of investors expecting to increase investments, at 37%, is up on last year (23%) but down on 2021 (49%). The same number of investors this year (37%) expect to maintain the same level of investment, but this is down on 2021 (49%) and 2022 (54%). In all, this suggests a relative slowing of anticipated activity. 

Some of the reticence to invest recently could be explained by the rise of the so-called denominator effect, whereby faster falls in listed markets quickly elevated investors’ weightings to private markets, including infrastructure.

Reasons to invest in infrastructure

“Attractive inflation adjusted returns for project investments. Access to ESG friendly investments not available in public markets.”

“Predictable cashflows, balance of yield and total return, inflation participation.”

“Long-term real cashflows typically underpinning infrastructure projects offer a good complement to our cashflow-aware strategy. Access to assets which are often not widely available in public equity or credit markets. More targeted climate transition opportunities.”

For just under a third (30%) of investors, the denominator effect has inhibited investment and commitment levels (figure 7). But for more than half (52%), their infrastructure allocations were unaffected in this way. For a further 19%, it was a temporary issue that has now resolved itself.

Looking at actual allocations, the picture is also of relative moderating in growth. Only 44% of investors expect allocations to rise over the next 18 months – and this proportion has fallen steadily from 60% in 2021 and 50% in 2022 (figure 6). The largest proportion (48%) of investors expect allocations to remain stable, and this is up from 46% in 2022 and 36% in 2021. Finally, 7% expect their allocation to drop, which is a slight fall on last year (8%) but an increase on 2021 (3%).

“While inflation protection and a desire to invest in clean energy are strong incentives, it is clear that investors are concerned about the cost-of-living crisis fuelled by inflation”

Further evidence of this moderating comes from investors that do not invest in infrastructure and a potential lack of new entrants to the asset class. The survey captures responses from pension funds and other institutional investors generally, including those (23% of overall respondents) with no exposure to infrastructure (figure 1).

For the first time in recent years, none of the investors in this group had definite plans to invest in infrastructure in the future – down from 18% in 2022 and 21% in 2021 (figure 2). That said, 63% stated that they might invest in infrastructure in the future, which is up from 46% in 2022 and 50% in 2021.

When asked to give reasons for investing in infrastructure, key factors were repeated:

•Stable cashflows
•Inflation protection
•Diversification
•ESG/energy transition

The fourth reason – ESG and participating in the energy transition – should not be understated. Waste/water (100%), solar (92%) and wind (84%) were the three most favoured sectors (figure 19). Nearly three quarters (74%) of investors have an explicit objective/intention to contribute to the energy transition and net-zero agenda through their infrastructure investments (figure 20).

But while inflation protection and a desire to invest in clean energy are strong incentives, it is clear that investors are concerned about the cost-of-living crisis fuelled by inflation and the potential for this to lead to popular and political pressures and policy changes. Political intervention and regulation, collectively, was cited as the greatest risk facing infrastructure investments by more investors (30%) than any other (figure 10). This was followed by valuation uncertainty and availability/cost of debt (both 19%).

INVESTOR SURVEY RESULTS

 

1. Do you invest in infrastructure?

2. If you do not invest in infrastructure, which of the following apply?

3. What are the main reasons why you do not invest in infra?

4. How has your infrastructure portfolio performed over the past 12-18 months

5. How much do you expect to invest:commit capital to infrastructure strategies over the coming 12 months?

6. Do you expect your allocation to change over the next 18 months?

7. Has the denominator effect of falling values in listed markets negatively impacted your ability to allocate:commit capital to infrastructure strategies?

8. Has your infrastructure provided a hedge against inflation over the past 12-18 months?

9. Are you confident your infrastructure investments will provide an effective hedge against inflation going forward?

10. Which of the following poses the greatest risk to infrastructure investments?

11. Where does infrastructure sit within your portfolio?

12. How important is liquidity in your infra portfolio

13. What investment holding period are you comfortable with for infrastructure assets?

14. In which geographical regions do you want to focus new investments?

15. How do you invest in infrastructure?

16. Do you invest in emerging markets infrastructure?

17. What are your gross annual return requirements for infrastructure EQUITY investments?

18. Where in the risk spectrum are you focused for new investments?

19. In which regions are you seeing the best investment opportunities?

20. Which sectors do you want to focus new investments on? (%)

21. Do you have an explicit objective:intention to contribute positively to the energy transition and net zero through your infrastructure investments: allocation?

22. Do you have net-zero targets for your entire infrastructure portfolio (including, for example, transport assets)?

23. Would you consider a lower return in order to make a social impact?

24. Are you making social impact investments through infrastructure?

 

Top 100 Infrastructure Investors 2023: Survey