“We are at a new paradigm in the market where real assets are becoming mainstream, rather than alternative, investments,” claims Vittorio Lacagnina, director responsible for capital formation in infrastructure across North America and Europe, at QIC Global Infrastructure in New York.
Volatility in government bond yields hasn’t been the key driver for these clients to allocate to infrastructure debt Tim Humphrey, |
QIC, which is owned by the State of Queensland, recently announced the first close of its Global Infrastructure Fund at 50% of target after raising more than $800 million of new capital by August. “According to market research 38% of institutional investors now have a defined allocation to infrastructure and others have an allocation to real assets or inflation hedging – all of which would encompass infrastructure,” says Lacagnina.
While it may be premature to redefine all alternative strategies as mainstream investments, the impact of years of monetary easing is increasingly being felt in the allocation process.
“Both retail and institutional investors are getting a little tired of such low interest rates and high volatility,” says Brian Jacobsen, chief portfolio strategist at Wells Fargo Asset Management in San Francisco. “They are thinking that if they are going to get this kind of volatility they might as well earn a little more income. I recommend clients now have 10% of their portfolio allocated to alternative strategies and infrastructure is a growing part of this – often 25%.”
That is an awful lot of money in aggregate. And while the sector’s needs are enormous (the World Economic Forum calculates the estimated shortfall in global infrastructure debt and equity investment at roughly $1 trillion a year) the surge in investment is far from uniform across the sector. And it also comes as the number of available deals into which investors desperate for allocation to such assets can invest seems to be slowing.
According to alternative asset data provider Preqin, the aggregate value of infrastructure deals completed globally in the second quarter of this year was $60 billion via 121 deals – down from $70 billion from 139 deals in the first quarter of 2015 and nearly half of the $110 billion from 225 deals in Q2 2014.
“There is distortion in the infrastructure market in general due to the number of new investors focusing on the asset class,” Lacagnina explains.
Key driver
Traditional infrastructure investors have remained largely immune from the recent market volatility, but it has forced others to consider these assets.
“Most of our infrastructure debt investor base are following liability matching strategies, and recent volatility in government bond yields hasn’t in our view been the key driver for these clients to allocate to infrastructure debt,” says Tim Humphrey, co-head of structuring and investor strategy at Macquarie Infrastructure Debt Investment Solutions (MIDIS).
“The key driver for these investors has been a desire to earn a yield pickup over government or corporate bonds, which has remained relatively stable over the last year. There will be investors who are more heavily influenced by the need to achieve a certain absolute level of return – such that recent low government bond yields will have led some investors to consider infrastructure debt as a possible way of accessing additional yield where they have the capacity for holding less liquid investments.”
“There has been some degree of spread pressure,” says Andrew Robertson, co-head of structuring and investor strategy at MIDIS. “In infrastructure the impact is diverse. Spreads on continental PPP deals have come in significantly from the high 200 basis points to the 120bp-style range. This is because for insurers and other institutions their first port of call to put money into infrastructure is often PPPs.
"However, in other parts of the market spreads remain above 200bp. The limiting factor on the supply of funding is the complexity of getting to those deals.”
MIDIS closed a UK inflation-linked debt fund in mid-July, bringing its global infrastructure debt platform to $3.9 billion.
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Andrew Robertson, MIDIS |
The scramble for allocation to infrastructure – and the complexity of the asset class itself – has led many institutional investors to seek exposure as part of their private equity bucket. And this exposure can lead them to the more esoteric corners of the market. “Pension funds are becoming more willing to look at different things and their allocation to alternatives is increasing,” says Tony Foster, CEO at Marine Capital, a specialist shipping asset manager. “Shipping is a very small, new, esoteric asset class for them and they are still at the lower end of the learning curve.”
He has seen a sharp increase in private equity activity in this part of the market in recent years. “The tourists [in the shipping market] are mostly private equity firms, many of which don’t spend enough time looking at strategies but just see a market in distress and dive in. Private equity interest in this market has grown over the last three or four years and by some estimates they could have invested around $25 billion to $30 billion in shipping. But given that this is a $2 trillion market, their participation is still very small.”
Many private equity firms have found the going tough, and unpredictable, in shipping: in April Oaktree saw one of the vessels it owns, the Maersk Tigris, seized by Iranian authorities in the Strait of Hormuz.
As low interest rates and market volatility persist, the infrastructure asset class will attract a greater volume of investor funds. The returns on offer in the less risky parts of the market will inevitably fall, and the type of investor attracted to the riskier end will change – a development not always welcomed by the traditional investors in this market.
“Private equity firms are not a good source of permanent capital, which the shipping market sorely needs,” says Foster at Marine Capital. “The suppliers of permanent capital ought to be able to dance with the needers of it.”
