Asset owners over-ambitious on infrastructure returns

Eight in 10 institutional investors in Asia Pacific expect 8%-plus returns from infrastructure, though they are seen to be looking to the asset class more for income than capital gains.
Asset owners over-ambitious on infrastructure returns

A large majority of Infrastructure investors expect 8%-plus annual returns from infrastructure assets, and one-third (32.6%) anticipate returns of at least 10% (see graph), according to a new survey by AsianInvestor and Australian asset manager QIC.

The poll was based on the responses to a questionnaire that asked a selection of Asian asset owners about investing into infrastructure assets.

These high levels appear ambitious in an environment when low interest rates have led to more bidders for brownfield infrastructure assets (already begun, but early-stage projects), causing valuations to rise. This in turn is likely to have led more investors to consider infrastructure for the recurring revenues it offers, rather than the capital appreciation it might provide.

“My guess is that a large proportion of the return appetite [of poll respondents] would now be seeking income rather than capital gains,” said Ross Israel, head of global infrastructure at QIC.  

However, this attitude varies between asset owner types. Israel noted that pension and corporate funds prefer long-term stable assets, to better match their liabilities. In contrast, sovereign funds and endowments tend to take a more return-driven approach.

Adviser approach

The varying needs and return expectations of asset owners when it comes to infrastructure investing has led to a greater need for expert advice.

Asked which attributes they consider to be paramount in an infrastructure manager, 55% of asset owners said the most important factor was finding a manager with an experienced and stable team. It was also important to have a strong brand and local presence.

As for selection strategy, only 6% of respondents said they relied entirely on asset consultants to pick infrastructure managers. Fifty percent use in-house selection methods, while 41% use a combination of both.

Israel said that more and more his firm was seeing asset consultants being used to back up what the in-house team has already decided.

Meanwhile, the particular requirements of infrastructure investing appear to be permeating asset owners in the region. Poll respondents listed ‘finding the right mandate to match internal criteria’ as their second biggest concern after valuations.

“Asian investors are on a journey which will see their [infrastructure] allocations grow, driving an increasing need to diversify and export capital from their home market,” said Israel.

Some 52% of respondents intend to add to infrastructure investments in the coming year, after two-thirds had raised their allocation the previous year, as reported.

Asia’s rising infrastructure needs could well end up marrying with the desire of asset owners to better diversify their rising levels of assets. Infrastructure investing looks set to continue evolving in Asia.

For the full poll results and analysis, please see the June edition of AsianInvestor.

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