An increasing desire among Asian asset owners to begin investing into infrastructure is forcing up asset valuations and making it difficult to source suitable investments. It’s also leading experienced infrastructure fund managers to plan new products to meet this need.
Gordon Noble, a former director of the Association of Superannuation Funds of Australia, believes a tussle has emerged between what he refers to as “the refugees from fixed income, moving into infrastructure” and those that have been invested in infrastructure for a longer period.
“You’ve now effectively got a battle within the infrastructure asset class between the refugees who simply want yield and the existing players who understand that infrastructure has a lot of risk in it, and it needs to be managed," Noble told AsianInvestor. "What you are seeing is the price of infrastructure assets being bid up," he added.
He cites the recent example of Australian asset manager Hastings paying 25 times earnings for the Port of Newcastle (NSW), when 10 years ago such assets were going for half that.
Noble said would-be market entrants are also frustrated by the fact that infrastructure investments don’t necessarily fit into a conservative investment framework very easily. For example, infrastructure projects do not typically come in bite-sized packages that allow for the creation of a wide array of products.
However, this is gradually changing with mature infrastructure investment managers such as Macquarie responding to the demand for a broader array of products investors can approach. "It’s a shifting landscape at the moment,” he said.
There’s certainly a need for more appealing and digestible investment products. Grace Chen, senior relationship manager at the Edhec Infrastructure Institute in Singapore told AsianInvestor investors were currently stuck “between a rock and a hard place; accessing infrastructure through ill-suited fund structures or investing directly and making unnecessary concentrated bets.”
According to Edhec, investors prefer investing into privately-held infrastructure debt or equity, as opposed to listed stocks or bonds. However, they are evenly divided between those who prefer direct investment and those who would rather delegate the investing duties to a manager.
Edhec’s research among leading asset owners globally shows that most investors understand that infrastructure investment only really makes sense as a long-term strategy.
“Asset owners say they are willing to buy and hold infrastructure investments until maturity i.e. for 20 to 25 years. This certainly does not apply to classic private equity funds, which usually have life span of only 10 to 12 years,” said Chen.
The academic institution’s most recent study of infrastructure investors was published in July. It took soundings from 184 investors, including insurers, pension plans and sovereign wealth funds, representing approximately $8 trillion in assets under management.
Over 80% of asset owners in the survey said that the classic closed-end private equity infrastructure fund is outdated and doesn’t add value. Close to half of those polled said they did not trust, or did not know whether or not they could trust, the valuations reported by infrastructure managers.
Edhec’s research also shows that investors have serious concerns about the transparency of infrastructure investments. They also complain that risk metrics are not documented and that valuations are hard to assess, which makes it hard to measure potential returns.
"Investors need a better understanding of the potential contribution of infrastructure assets to their investment strategy," said Chen.
These problems, and a general dissatisfaction with the high level of fees charged, could be addressed, said Chen, if there were usable benchmarks which can adequately measure the risk-adjusted performances of their investments to better understand the potential of these assets. She added that Edhec is currently working on a five-step roadmap to build reference portfolios of infrastructure equity and debt.
The need for investors to better understand infrastructure assets is not related solely to investment returns, but also their social importance, added Noble.
He is now a principal adviser to the Better Infrastructure Initiative in Australia and is the co-author of a report published today by the University of Sydney’s John Grill Centre. Entitled ‘Shifting Australia’s Infrastructure Mindset’, it suggests several measures relating to the sector, including the need for investors to take a more societal role in infrastructure development.
Noble believes that the shifting dynamics of the infrastructure market will require investors to become more accountable to their end-clients and communities in which the infrastructure projects are being built or operated.
The John Grill Centre report is proposing an investor accountability protocol. Noble believes this could become a global standard.
"Just as governments have a role to play in building the social licence for ongoing asset privatisation and government balance sheet reform, so too do investors," says the report. "In fact investors are central to the process of deepening the market of opportunities to improve both productivity and community amenity for which infrastructure is core.”
Noble says it is not enough just to invest: “Because of the way institutional investments are structured, we cannot assume that the interests of infrastructure asset owners will automatically align with the community’s interests.”
The report suggests that for long term sustainability, a conversation is required about developing new accountability standards.
“The importance of infrastructure assets to the community and to a local economy – which is one of the main reasons that they are so attractive for investors in the first place – means that stakeholders have an interest in how assets are managed," the report noted.