I have previously talked to the effect of an increasing global population creating ever greater demand for infrastructure and the current trajectory of apparent under-investment. This has been exacerbated by the Covid-19 pandemic which has constrained supply further as governments' priorities have shifted and planned infrastructure projects have been put on hold. This has given valuers and analysts even more to think about when assessing existing investment opportunities, and will inevitably push up values. However, with so much geopolitical uncertainty, investors will seek investments that can weather the uncertainties and economic downturn which is what infrastructure offers: uncorrelated, stable and resilient returns.
The attractive alternative
Infrastructure continues to be an area of focus for investors, and it is easy to see why. In an increasingly low yield environment, annualised returns of 15.2% - as reported by The California Public Employees' Retirement System's (CalPERS) infrastructure portfolio in the 10 years to December 31 2018 - are a clear demonstration of why infrastructure is attracting strong interest from investors.
In search of transparency
While the number of specialist managers focused on infrastructure investment assets is relatively concentrated to a small group, the appeal to institutional investors is on the rise and as such, there is a demand for greater transparency in pricing and valuations generally. The G20 has also responded with an express objective to develop a global infrastructure asset class and a number of core benchmarks such as industrial activity, geography, corporate governance and interest-rate risk.
However, given the eclectic range of underlying investments, the challenge for infrastructure funds revolves around the perennial issue of identifying, valuing or assessing and then monitoring actual risks of each individual investment. This can be even more challenging when assets are held in unlisted or private market structures akin to private equity real estate funds.
While most infrastructure assets never come to the market, for those that do, each investment can have a unique market position, management, customer base, regulators and array of real estate assets - such characteristics throw up challenges for boards approving the underlying valuations. Boards also need to consider conflicts of interest between managers and valuers, appropriateness of discount rates applied to discounted cashflow models and other assumptions that may be used. A level of objectivity is essential, similar to that within larger funds or leveraged funds that are subject to the Alternative Investment Fund Managers Directive (AIFMD).
Some will argue that these private markets offer greater returns in part because of their opaque nature, but it's still challenging for illiquid infrastructure assets where the information needed to asses the risks is not always available. Both investors and managers therefore have to make their own estimates of the risks and price them accordingly. Great reliance is also placed on professional valuers to assess the intricacies of each investment in forming their opinion of market value.
In part two of this article, we examine the benchmarks used to identify different infrastructure types and how they influence valuations.
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