Volatility in power prices poses a challenge in terms of what structures work for investment-
grade debt investors. Thomas Foucoin,
Pension Insurance Corporation
If you look at the base rate rise, investment-grade debt we invest in is at 5.5% to 6%. A year ago, when rates were negative investors were pleased with our ability to floor the base rate and bring a spread of 250bps.
Our ability to do fixed or floating rate transactions, captures the higher base rates, keeps our asset class attractive compared to corporate or sovereign bonds, for example. Ebner: In equity, life is more complicated. We cannot argue on spreads because pricing for equity is not as elastic as for illiq- uid assets. In essence, real assets, be it real estate or infrastruc- ture, tend to maintain their valuation and, therefore, the return expectations are stable.
This brings me to our understanding of the market. We form a view whether a certain equity risk exposure brings along a fair risk/return profile. Ten years ago, a brownfield invest- ment was fairly priced. Five years ago, it wasn’t. There was so much capital inflowing from equity investors for brownfield assets that the risk/return profile was too low – it was tendered to death. We changed our strategy to a more risk-assuming strategy and entered the value chain much earlier, creating higher returns. It is always in the view of investor whether this is a fair price risk/return profile.
As a result of the increase in risk, somehow the equity returns have to come up as well. It will take longer when compared to
the volatile debt markets or equity markets, but equity returns will come up. Taj: In the listed market, we cannot guarantee returns because we are tied to the broader equity market. Typically, what we see is a 3% to 3.5% yield and 6% to 7% earnings per share growth for a 10% total shareholder return. Comparing returns on listed infrastructure companies going back 20 years with private returns, they are almost the same. Obviously, there is more volatility around the listed returns, but in the end they converge. That is effectively because you are investing in the same types of assets, but the fees on the private side are high. Although you get a higher net headline return, it is quite com- petitive with the listed side. For long-term investors, people may not have the sophistication to get involved in managing the asset and to go through the nitty gritty of regulation, listed is a good alternative on the infrastructure side. Vanstone: Like many pension schemes, we have inflation-linked liabilities and so have inflation-linked return targets. At the moment, we have to try and take a view on what long-term inflation looks like.
Spread wise, for us at the core end of infrastructure across a blend of debt and equity, we are looking at up to 2%. For growth or greenfield infrastructure, it will probably be close to double-digit return requirements with the recent increase in risk-free rates.
December – January 2023 portfolio institutional roundtable: Infrastructure 23
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36
