The seventh annual Institutional Investing in Infrastructure conference took place earlier this month in Half Moon Bay, Calif. This was quite a shift in venue — previously, the conferences had been held in the more “infrastructure-type” cities of Chicago, Dallas and Washington, D.C. But with the change in atmosphere outside the conference room came a shift in atmosphere inside the conference room as well. Discussions were more animated; the audience was more engaged; discussions delved deeper; everyone just seemed more focused. It felt like we’ve reached the tipping point — infrastructure is here to stay, even if there are still lots of questions to be answered.
Investors made it clear that they need more data, they need more transparency, they need a set of standard practices and they need a benchmark. In fact, benchmarking turned out to be one of the conference hot topics. We’d only allowed a half hour for Anthony de Francesco’s presentation on the IPD Australian infrastructure fund index — and we could have gone all morning. Who knew wonky indices could generate such interest and audience interaction?
Nearly all the panels discussed risk in one way or another. It was noted that the government is going to be your partner in all of these investments, so you better get who takes what risks correct from the beginning.
Greenfield investment has always been seen as riskier than brownfield, but this is not always the case. More brownfield investment deals have failed or blown up than greenfield deals — though this could be because there have been more brownfield deals than greenfield.
One of the head-slapping moments for me was when a long-time investor noted that the characteristic that makes infrastructure so attractive — its really long-term duration — is the same characteristic that makes it so risky. It’s nearly impossible to forecast demand, government actions and technological advancements that could make your asset obsolete that far down the road. That leaves investors with an asset that they’ve underwritten with actionable data for the early years, and underwritten with crossed fingers for the later years.
Another example of the havoc long-lived investments play on investment forecasts is the embedded greenfield risk in brownfield investments. A lot of investors look at brownfield investments as core and are happy with core returns. What they fail to appreciate, however, is the greenfield risk embedded in any asset that you plan to hold for 15, 20, even 30 years. At some point in these assets’ lifecycle, investors are going to have to put new money into new plants and equipment, into repairs, into expansion, into facility upgrades, into new technology, all of which are substantially more risky than core infrastructure. They are essentially future greenfield risks. And if investors don’t consider these risks beforehand, they will never be rewarded for taking them. But how do you price that future greenfield risk? The answer to that question and others will need to be taken up at a future I3 conference.
It’s no secret that infrastructure is an emerging asset class. In fact, it’s at the stage where a sizable contingent of the investment industry would still argue that it’s not really a class at all — though most now agree that it has the characteristics of a discrete diversified class.
But because infrastructure is not a mature class, we are still feeling our way around the edges. A lot has been learned in the past 10 years or so, but we still have a long way to go. Enough deals have succeeded — and enough deals have failed — to enable the market to begin to see a pattern and to begin to focus on what makes infrastructure unique. What does it do for a portfolio? What are realistic returns? What are the inherent risks? What are the best investment structures?
We might not have the answers yet, but we at least have begun to know the questions. And that is progress.
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Sheila Hopkins is managing director – Europe and infrastructure with Institutional Real Estate, Inc.
