Infrastructure markets, similar to most markets today, have had a long run of rising valuations, but if the discussions at IREI’s 10th annual Institutional Investing in Infrastructure Editorial Advisory Board meeting are an indication, those valuations will be challenged in the near future. This was one of the key takeaways from the discussions between i3 board members at their meeting in Chicago in November.
i3’s board comprises 40 members — 13 institutional investors such as public and corporate pensions, sovereign wealth funds and insurance companies totaling more than $2 trillion in total assets under management and $9.3 billion in infrastructure holdings; 11 consultants with $5.3 trillion in total AUM and more than $94 billion in infrastructure assets under advisement; and 12 investment managers with $1.2 trillion in AUM and $134.2 billion in infrastructure holdings. Combined AUM and infrastructure holdings in the room for this year’s board meeting was more than $8.5 trillion and $237.6 billion, respectively.
The 2018–2019 i3 board represents a broad perspective of the institutional investment community and includes the California Public Employees’ Retirement System, College of Applied Arts and Technology Pension Plan (Toronto), Government Pension Investment Fund (Japan), First State Investments (Australia), John Hancock Financial (New York) and Cube Infrastructure (Luxembourg), among others.
The money talks
One consensus from the board was that we are in the late cycle of a bull market, and while most did not want to try to pinpoint when exactly that will end, there was agreement that it’s coming and investors need to prepare.
The discussions at the meeting focused on more than the dynamics of the late-cycle market. i3 board members covered a range of subjects, developed with “Food for Thought” feedback to IREI prior to the meeting. IREI asks each participant what three to five questions or topics they would like to discuss with their peers. Investment management board members are asked what questions they would like to ask of investors and consultants, and investors and consultants are asked which questions they would like to ask of investment managers and consultants or investors.
The topics and questions board members develop are the basis for meeting discussions that are held in small group settings with group leader reports to the full group, in discussions with the full 40-person board, and at dinners and networking events. Below are several of the key topics discussed at the meeting based on this feedback.
- Current vintage infrastructure funds seem to be at the top of the market, with terms moving further in favor of general partners and coinciding with significant increases in fund size. Why are more limited partners not pushing back?
- Dry powder — is there too much capital targeting infrastructure investments, or is the demand for infrastructure so vast that the possibilities are endless?
- Infrastructure performed relatively well in the previous market downturn. In the current late-cycle investment market, investors are committing to infrastructure and recognizing the downside protection it could provide during a future market downturn.
- It is a manager-friendly market. GPs have the upper hand in the manager selection process and in negotiating the terms of commitments.
- What are the risks/returns you are expecting from infrastructure in the coming five to 10 years?
- How do you define core, core-plus and value-add strategies?
- Infrastructure needs better benchmarks, but is the market too distinctive and bespoke to expect these to be similar to other asset classes such as real estate, private equity, etc.?
In between the discussions on these topics, IREI polled the board with questions related to the talks and Food for Thought feedback. To kick off the talks, IREI asked the board what topic they wanted to begin with — capital deployment, deal flow and strategies (35%), investment styles and risk-return profiles (25%) were the top vote getters, followed by funds, direct and co-investment (17%), investor allocations and portfolios (14%) and environment, social and governance and benchmarks each with 6%.
More quick tally poll takeaways
- The most appealing strategies for the next 12–18 months: co-investments in partnership with GPs/managers (35%), specialist funds (29%), supercore funds (12%).
- The return range for core infrastructure in the current market is 6-7% (53%), 5-6% (21%) or 7-8% (18%).
The year ahead
The discussions at this year’s board meeting will shape the editorial direction and content of the i3 publication, and the issues and topics brought up will continue to be reported on in feature articles throughout 2019. Board members will be interviewed and relied on to bring i3 readers insight into infrastructure investing globally as well as contribute articles and perspectives that can help others in the industry understand infrastructure investing issues and trends as the new year unfolds.
