The conversations and discussions at this year’s Editorial Advisory Board meeting for Institutional Investing in Infrastructure and the I3 Infrastructure Strategies conference had a different focus and feel from the past few years. The agendas of both events are created with the input of our advisory boards. Our conference advisory board sets the agenda through a series of conference call discussions, and, in the case of the board meeting, we send out a “Food for Thought” survey and ask each member to tell us which issues and subjects they would like to discuss. Below are several key takeaways from this year’s discussions.
- This year environment, social and governance, or ESG, issues were discussed more in depth than in past years. That being said, infrastructure investing is always focused on these issues by default because they are integral to any infrastructure asset, whether it is the redevelopment of an airport that will impact marshlands or noise in nearby neighborhoods, or a toll road that serves thousands of commuters who will have an opinion about new fees or the condition of the roads and voice those with local officials.
- The discussions of ESG issues coincided with conversations about political and regulatory risks, and one key takeaway is that broad generalizations about countries and markets and their political and regulatory risks are ill-advised. Investors need to look at markets individually on a case-by-case basis — just because it is OECD versus non-OECD does not mean the former has less risk than the latter, editorial board members commented. For example, is Turkey (OECD) or Singapore (non-OECD) a true “OECD market”?
- Another indication that the current infrastructure investment cycle is changing or maturing is the concern among investors and investment managers over meeting expected returns. A majority (65 percent) of I3 conference goers indicated competition for deals is the single biggest challenge to earning a competitive return. Concern about rising interest rates (19 percent) was a distant second place in the quest to achieve a good return on infrastructure investments.
- Many I3 attendees agreed with panelists that investors perceive the core infrastructure markets as overpriced, and returns are close to the equivalent of a 10-year bond — 7 percent is the new 8 percent in 2015.
- The flip side of the reality of increased competition for buyers of infrastructure assets, as an investment manager panelist noted, is that sellers are in a prime position to dispose of assets at a good price and harvest a strong return, especially with large marquee assets in auction transactions. “We love to sell into the core market,” the panelist noted. “Execution matters. If [a buyer will] pay 10 percent more than you should, that is leaving value on the table.”
- Yet another sign of the maturity of the current investment cycle — as well as the infrastructure market itself — is the growth of secondary markets. Panelists noted the secondary market is still nascent, but it is growing, and they speculated the 2005–2007 vintage-year funds could soon be the next secondary market sellers.
- Investors who want to make co-investments need to plan and think through the process before an opportunity presents itself — by that time, it is too late to take their time and review the opportunity. The process moves fast and decisions must be made in real time with a lot of information arriving in a short period of time. Investors must set up their investment team, investment committee and board of trustees to execute a co-investment long before the opportunity is in front of them for review.
- Value in today’s infrastructure markets can be found in smaller U.S. power assets — valued-added, not core investments — because there are fewer bidders in the market compared to many core markets.
- Listed corporate buyers are active in deal markets; their balance sheets are strong, and they are aggressive.
- Direct investors with long-term investment horizons and few or no short-term cash calls also are competitive in today’s markets — they can bear higher prices because their hold periods are long, and they do not have short-term cash needs that require selling assets on short notice.
- Like never before, governments are focused on developing a pipeline of investable infrastructure assets that private investors can access — P3 will become a more widely accepted model by governments all over the world.
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Drew Campbell is senior editor of Institutional Investing in Infrastructure.
