With many global stock market benchmarks reaching or exceeding record levels and infrastructure fundraising picking up, it is beginning to feel a little bit like the “good old days” of 2006–2007 just before the market crash. Of course, as American writer Mark Twain reminds us: history doesn’t repeat, but it rhymes.
So while today’s markets might not have the same frenzied feel as those in the run-up to the crash six years ago, values are getting fairly rich and a lot of capital has been raised that needs to be deployed.
The last time infrastructure markets — and most markets for that matter — were faced with similar conditions, it turned out many people and organizations didn’t know how to apply the brakes, and capital continued to flow into closed-end funds that with the help of cheap-and-easy financing bid prices for infrastructure investments up so high they undermined the very premise of infrastructure investing for many investors — relatively low volatility, low risk and low return, income-producing, inflation-hedging, portfolio-diversifying investments.
This time around, however, there seems to be more caution. That’s probably partly a function of new financial regulations, as well as the fact that the lessons learned and pain endured from just a few years ago are still very fresh in everyone’s mind.
In infrastructure markets, there also is evidence of new reactions to rising competition and prices. Some investors have recently announced they are seeking out listed infrastructure investments, which also have high valuations but offer clear exit strategies that can be quickly executed should markets decline.
Another reaction is to simply sit it out until prices come down.
But it’s another response that might be the most interesting. In conversations with some of my Institutional Investing in Infrastructure publication and conference advisory colleagues, it sounds like a growing number of investors are open to the idea that infrastructure can fit into a larger real assets allocation with timberland, agriculture, commodities, energy and real estate. And that investments in these sectors can be compared against each other and can be interchangeable. They might not be physically similar — a toll road is different from timber forests, for example — but their risk profiles are similar, and they can accomplish similar objectives for investor portfolios.
One advantage of this approach is if prices are too high for the limited number of available quality infrastructure investments, then investments in timber or commodities that have a similar risk/return profile (lower risk/return than private or public equity, for example, with income, inflation hedging and diversification) could make a suitable replacement.
This way of organizing and administering a portfolio could help solve the problem of committing capital in a market where asset prices are being bid up by the competition. This approach could allow investors to take their feet off the gas pedal, slow down and take a look around at what could be very similar investment opportunities. Doing so can open up the universe of investable assets and let managers and direct investors compare more opportunities across real asset subsectors that may be in different cycles of price appreciation, and therefore offer different value propositions and with similar risk profiles and investment characteristics.
The idea of a real assets allocation with infrastructure as one of several subsectors, is similar to another increasingly popular allocation — the private markets allocation. The private markets universe can include private investments in real assets, private equity and hedge funds, for example. The idea is similar — unconstrained searches for investments that fit a certain risk profile and decision making that is not restricted by rigid asset class-based investment policies that set up a “siloed” way of investing.
It’s an idea worth keeping an eye on, and we can help you do that — Institutional Investing in Infrastructure will devote a feature article to this topic in the second half of 2014.
Not a subscriber to IREI Insights blog? Sign up to receive alerts on new blog posts.
Drew Campbell is senior editor of Institutional Investing in Infrastructure.
