Altius Associates anticipates that institutional investor allocations to private infrastructure funds will grow dramatically over the next decade, either as a standalone asset class or as part of a broader real assets allocation.
In a new report entitled “Infrastructure as part of a global investment portfolio”, Altius states that institutional investors currently have less than one per cent allocated to infrastructure but it expects this figure to increase to approximately five per cent over the next decade.
The report describes how a long term demand/supply imbalance is creating strong fundamentals for infrastructure investments.
Reyno Norval, infrastructure specialist at Altius Associates, says: “Governments at all levels throughout the developed world are simply unable to supply the capital required for public infrastructure projects because of large deficits and severe budgetary pressures. Increasingly, they are seeking to access private capital to build new assets, expand or renovate existing assets, and supply the provision of essential services.”
According to Altius, the need for massive infrastructure investment is not in dispute. In its recent global infrastructure report, the OECD estimates that Asia/Pacific region will need USD15.6trn in infrastructure spending, Europe USD9.1trn, Latin/South America USD7.4trn and North America USD6.5trn through to 2030.
The report notes that performance history for infrastructure investments is fairly limited on the listed side and non-existent for private funds. While it is too early for total return performance data to be available from this young asset class, Altius has started to see the best private infrastructure managers delivering their target yields. Moreover, comparing 10-year net returns of three traditional asset classes (US equity, non-US equity, and global fixed income) and three real asset classes (public energy, listed infrastructure and private energy), real asset classes have outperformed traditional asset classes.
According to Altius, infrastructure will continue to gain importance and recognition among institutional investors because it provides:
• An attractive expected risk / return profile while also offering downside protection if implemented properly
• An inflation hedge, demonstrated by the fact that public infrastructure and utility stocks have significantly performed world equities during periods of three per cent or greater inflation
• Modest correlation with other asset classes thus providing good portfolio diversification
• Long-term positive cash flows, which closely mirror the long term liabilities of many institutional investors such as pension funds and insurance companies.
Norval says: “Institutional private infrastructure is a relatively new investment area, although starting to mature. The momentum in the industry was temporarily slowed by the financial crisis, reaching a cyclical low point in 2009 – however infrastructure demand and investment has rebounded and the outlook is positive. This asset class shares characteristics with several other asset classes such as fixed-income, real estate, and private equity.”