In response to suggestions that listed infrastructure is a fake asset class, Benjamin Morton argues that investments should not be defined by the wrapper but by the underlying assets
The trend in 2017: if you don’t like the news, just say it’s fake. Apparently, this approach has crept into the investing world too. With the tremendous demand for infrastructure investment, there has been much debate over the relative merits of investing through private or public markets.
In particular, we have noticed a frenzied effort by some organisations partnered with private-equity groups seeking to discredit listed infrastructure.
We’ve heard this argument before – 25 years ago with commercial real estate. Today, many institutions globally employ both listed and private real estate as complements to each other. So why not infrastructure?
For the context of this discussion, let’s take a look at the infrastructure investment landscape. Over the past few years investors have poured hundreds of billions of dollars into funds promising access to toll roads, airports, power transmission and other infrastructure assets, hoping to capitalise on the enormous need for private infrastructure funding. Yet much of this capital remains idle, as private equity managers often find it easier to raise money for an idea than put it to work in a market of finite opportunities.
Infrastructure data provider Preqin estimates that, as of June 2017, private equity managers targeting infrastructure had $150bn (€165bn) in dry powder. Where private investments have been made, they are often changing hands at significant premiums to listed market valuations, due in part to the imbalance of capital available relative to the projects for sale.
As they have in the past, we expect some of these managers will look at listed infrastructure companies as potential acquisition targets. These managers clearly consider the assets owned by listed infrastructure companies as appropriate for their clients’ objectives.
Meanwhile, more investors are looking to the listed market as a means of implementing a global infrastructure allocation, both standalone and to complement private infrastructure.
In 2016, global assets under management in listed infrastructure strategies reached $86bn, up from $20bn in 2011.
In our view, infrastructure should not be defined by its ownership vehicle, or wrapper, but by a specific set of assets and regulated or concession-based structures. We believe a good example is the FTSE Global Core Infrastructure 50/50 index.
The FTSE index consists only of companies that own and operate core infrastructure assets, which should prevent dilution of infrastructure characteristics that may occur in a more broadly defined sample set – for example, one that simply relies on standard industry classification codes.
Furthermore, compared with other listed infrastructure indexes (and many private infrastructure funds), the FTSE index is diversified across utilities, transportation and commercial infrastructure, and is not overly concentrated in any region.
From its inception in 2009 through June 2017, the index had an annualised return of 9.9%, compared with 9.1% for the MSCI World index, with 270bps lower volatility and 50% downside capture.
Moreover, correlations remain low relative to bonds and have generally returned to pre-financial crisis levels relative to equities, consistent with other infrastructure indexes before the financial crisis. In our view, those are distinguishing characteristics.
“Investors have poured hundreds of billions of dollars into funds promising access to… infrastructure assets”
Arguing over whether listed or private infrastructure is better misses the point. Both vehicles can offer attractive features, giving investors access to long-lived assets in generally monopolistic industries that have historically generated relatively predictable cash flows, often linked to inflation.
Furthermore, we believe both listed and private vehicles will be vital in raising the tens of trillions of dollars needed in the coming decade to finance critical infrastructure improvements. That should create opportunities for attractive returns in both markets.
We have already seen the potential for capital formation in listed markets with commercial real estate. Since the start of the modern real estate investment trust era in 1991, the global real estate securities market has grown from a $100bn market cap to about $2trn. From a time when the majority of institutional real estate allocations targeted private investments, listed real estate is now widely recognised as an effective way to allocate to real estate and is used in both institutional and individual portfolios globally.
Similar to real estate, we expect listed infrastructure to continue gaining share in investor portfolios, based on its attractive investment characteristics and the ability to efficiently implement globally diversified portfolios.
Several factors may ultimately guide an investor to a private or listed allocation – including liquidity budgets, yield and total-return targets, leverage tolerance and risk appetite. Also, investors may want access to infrastructure themes that may only be available in either the listed or private markets.
Such considerations are reasonable; in our view, arguments over real and fake infrastructure are not.
As with real estate, we believe infrastructure should not be defined by its wrapper but by a set of assets, contract/concession/regulatory structures and investment characteristics.
Using an appropriate universe focused on core infrastructure characteristics, listed infrastructure has historically exhibited equity-like returns with the distinguishing attributes of reduced volatility, downside protection and low correlation to other asset classes.
Considering the need to fund critical infrastructure improvements, we believe both listed and private vehicles will be vital in driving capital formation and presenting investment opportunities in the coming decade.
Benjamin Morton is senior vice-president and portfolio manager at Cohen & Steers