In part two of this series examining the infrastructure investing market, Head of Alternative Investments, Simon Burgess identifies its similarities with real estate and private equity investing and how infrastructure is also featuring within the Real Estate Investment Trusts (REITs) market.
Hitting the mainstream
Previously occupied by major pension and sovereign wealth funds seeking liability matching yields and inflation protection, infrastructure projects are often income-producing real asset-backed investments that frequently offer attractive returns over the long-term. In many cases, infrastructure investments are dependable, unique assets offering portfolio diversification and can transcend political and economic cycles. It is also seen as necessary. McKinsey Global Institute estimates that USD$3.3 trillion must be spent annually through to 2030 in order to support expected global rates of growth.
In conjunction with the stresses and strains of real asset investing in its widest sense, infrastructure is feeling the benefit of an increase in the number of funds with substantial 'war chests' of capital to deploy. It is important to note that this does not mean that more capital is being deployed across the market, just that the capital being collected is being deployed through larger funds; albeit across a fewer number of funds.
For example, over the past five years DWS, one of the world's top fiduciary infrastructure fund managers, successfully closed two Pan-European Infrastructure Funds ("PEIFs") raising €4.7 billion in total commitments by focussing on core unlisted European infrastructure investments. Similarly, Brookfield Asset Management and Global Infrastructure Partners have closed a number of flagship infrastructure funds, with the latest expected to top a cool USD$14bn.
In the UK, despite Brexit uncertainty it remains an attractive destination for foreign capital seeking medium to longer term investment prospects. The 2019 edition of The Global Infrastructure Hub and EDHEC Infrastructure Institute (EDHECinfra) survey ranked the UK as the third market with the most potential for private infrastructure investment over the next five years.
There are a number of interesting UK projects potentially on the horizon. Prime Minister Johnson may push through the introduction of a new 5G network, and he's indicated extra expenditure for hospitals. Extensions to the rail network, especially the High Speed project, are also obvious candidates. Also, recent talk of "Free Ports" throughout the UK after Brexit will demand additional infrastructure and real estate development.
A familiar alternative
Infrastructure investments often exhibit similar characteristics to both real estate and private equity investments, making them a relatable and attractive alternative.
A good example of an asset-backed infrastructure investment (sharing both real estate and private equity characteristics) is that of ports. Ports have both operational and logistical aspects that make them very similar to private equity investment plays. Also, given the underlying real estate interests, such infrastructure investments are subject to economic fundamentals and real estate market forces specifically where part of the asset's capital value is derived from leasing activities, rental growth and property risks implied in valuation yields.
Ticket sizes can also be cited as a shared characteristic between private equity and infrastructure investments. The individual ticket sizes of larger funds are greater, with the pool of potential investors being smaller due to the higher capital demands of bigger investments. As a result, this causes a thinner investment market, a characteristic more prevalent within a private equity structure.
In addition to the common advantages of infrastructure investments, the table below compares the similarities that infrastructure has with both private equity and real estate investments, adding colour as to why infrastructure is a popular alternative:
Private Equity Similarities
Real Estate Similarities
" Larger capital value
" Larger ticket size and similar fund characteristics
" Operational and logistical aspects to consider and run
" EBITDA based valuations
" Real Estate based
" Dictated by traditional RE market forces
" Continuous revenue stream through rents
" All risk yield based capital valuations
" Long duration, enduring dependable asset
" Continuous revenue stream through rental income streams
" Provides diversification
" Variable valuations bases (depending on specific asset type)
The rise of the non-traditional REIT
Infrastructure investing has also featured within the Real Estate Investment Trusts (REITs) market. REITs are now an integral pillar of the global property market. They offer an attractive exit route for a privately built portfolio and they are investor friendly, tax efficient vehicles for real estate investment. There are 50 listed on the London Stock Exchange alone. In June 2017, REITs occupied a total market cap of approximately $1.3 trillion globally, representing 41% of the listed real estate industry worldwide.
Traditional REIT investment opportunities include retail, office, residential and industrial sectors. There are dedicated infrastructure REITs which own and manage infrastructure real assets with rental income stream characteristics. Infrastructure property types may include data centres, ports, airports, wind and solar farms, fibre cables, timber, wireless infrastructure, telecoms towers and energy pipelines; all expanding markets in their own right.
We can expect the next wave of innovation to come from the ability to list individual property investments and infrastructure assets. IPSX, launched this year, is the first regulated securities exchange dedicated to the initial public offering and secondary market trading of companies owning single institutional grade real estate assets and multiple assets with commonality. And, the EIX (Estates and Infrastructure Exchange) was established to focus on the $2 trillion annual gap of unfunded global infrastructure projects they have identified.
A world in need
With the global population increasing, the demand for infrastructure has never been greater. As McKinsey highlight, from 2016 through to 2030 the world needs to invest $3.3 trillion per year (3.8% of global GDP) just to 'support expected rates of growth'. If the current trajectory of under investment continues, this target will be missed by $350 billion per year. These figures highlight a necessary and permanent demand for infrastructure investment, which present a huge opportunity for private capital to fill the gap.
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