Infrastructure – Feature
The survey, which sought the views of 63 institutional inves- tors across 16 countries, revealed that 60% of respondents are under allocated to infrastructure.
The report said that sentiment towards private infrastructure remains relatively strong, but on average, global institutions are under-allocated to the asset class by 98 basis points relative to their targets, supporting expectations of increased capital flows into the sector. Mark Rudovic, principal and head of real assets at Hodes Weill, said: “Despite systematic risk in the form of the denominator effect plaguing private market allocations during the last 12 months or so, sentiment towards infrastructure amongst allo- cators remains positive given the resiliency of performance through a rising interest-rate environment, heightened geopo- litical tensions, high inflation and global supply-chain chal- lenges impacting all verticals of infrastructure.” Inflation
will, inevitably, be a big factor. “Infrastructure
remains a particularly favoured asset class for institutional investors, and the inflationary risks affecting other asset classes will drive capital to infrastructure as a safe haven, as asset own- ers are often able to pass through rising costs, demonstrating resilience in the face of a slowing economy,” Rudovic says. Commenting on why there is a lack of exposure to the asset class, Andrew Cox, co-head of infrastructure at Allianz Capi- tal Partners, said: “The reasons will vary between investors. However, infrastructure is a relatively low-return asset class, historically seen as secondary to private equity, which has higher but more volatile returns, but has also benefited sig-
nificantly from the lower interest-rate environment since the global financial crisis.” Cox does expect this under-allocation to rebalance somewhat in the current geopolitical and macro environment, as “investors look for more stable and predictable returns”.
Headwinds
Assessing how investors are navigating geopolitical and mac- ro-economic headwinds for the asset class, Simpraga says: “When it comes to investors committing new capital to the sec- tor, while a lot of macro-economic uncertainty persists, institu- tional investors are focusing more and more on the ‘super core’ assets which benefit from traditional infrastructure core qualities, such as high barriers to entry, quality and cashflows visible for the long term. These types of assets will tend to have more inflation protection built into the revenues, while their valuations may be less affected as more investors seek out quality assets.
“This trade-off between cashflows and valuation is something investors will need to continue to work through until the uncertainty in the macro-economic environment clears,” Sim- praga adds.
[Infrastructure] has proved itself resilient to economic downturns, as witnessed during Covid and through other recent macro-
economic challenges. Darryl Murphy, Aviva Investors
There are other challenges and risks afoot, despite an upbeat outlook for infrastructure, McCormack says. “Given its defen- sive nature, healthy yield and inflation hedge characteristics, we believe infrastructure is well placed to deliver relatively good returns in the current environment.” That said, McCormack sees the outlook for GDP growth as concerning, which could be challenging for some infrastruc- ture assets at the higher end of the risk spectrum. “Interest rates have also risen sharply over the last two years and the full impact of that may be yet to fully play out, although this has implications for all asset classes,” he adds.
And investors will need to remain alert, to make the most of the opportunities, Murphy says. “The ability to parse longer- term thematic trends will be increasingly important, to capture outperformance. Infrastructure investors will need to be able to identify key economic, political and technological develop- ments in order to identify the right assets. The risk profile of different types of infrastructure is likely to change as these trends play out, necessitating continual reassessment to keep portfolios future proofed.” Murphy also observes how rising rates, technological innova- tion and climate change will mean the next 20 years of infra- structure investment will look very different from the last 20. “But one thing is certain: investors will have to leave their com- fort zones if they are to grasp the risks and seize the opportuni- ties,” he says. Will investors embrace these opportunities to build infrastruc- ture into their portfolios?
Issue 126 | September 2023 | portfolio institutional | 49
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