Ask 10 investment professionals what is infrastructure, and you will get 11 answers. Or at least, that was the consensus of VIP Infrastructure conference attendees this week in Toronto.
And that’s not necessarily a bad thing. Nor is it a new thing.
The definition of infrastructure has been debated for as long as institutional investors have been investing in infrastructure. That definition also is evolving constantly, not only because the market and world are adopting new methods and technologies to deliver infrastructure, but also because the large volume of capital waiting to be invested.
With so much capital to be invested, and the assets being taken off the market due to so much interest, the definition of what is infrastructure is expanding to accommodate demand — for example, are data centers, cell towers, crematoriums, age care facilities, shipping and rail containers infrastructure? It depends on who you ask.
In some of these cases, the definition of infrastructure evolves and investors find these new asset types do in fact deliver the risk-return characteristics associated with infrastructure — predictable and consistent cash flows, sometimes hedged against inflation, and returns that are uncorrelated to public equities and other asset classes.
What shouldn’t be open to interpretation, however, are the risks associated with the various infrastructure sectors and geographies. These are the definitions that matters.
But as with most things, defining and understanding these risks is not straight forward either, as VIP Infrastructure attendees learned in their panel session: The State of Benchmarking.
The tools used to evaluate infrastructure asset performance and risk are only as good as the data that go into them, and, as one public pension attendee put it, that is “the elephant in the room.”
Investment managers, according to this investor, are being too stingy in sharing their fund and asset data with third-party benchmark providers, and in return, the investors who invest in their funds.
This kind of information can be used to evaluate the historic performance of the different asset types and sectors, which can help investors understand the risks and use this knowledge to construct portfolios.
“What is infrastructure?” asked this pension investor. “We can’t know because the data is not given by the GPs.”
That’s not entirely true, however; several organizations, including EDHEC, MSCI and Cambridge Associates, have developed or are developing performance indices. But they aren’t yet supported with enough data to be more useful.
In this environment, the best way an investor — especially an investor that is new to infrastructure investing — can answer the question “what is infrastructure?” is to know first what they want infrastructure to do for their portfolio.
And because infrastructure investment is not just one opportunity but a multitude of opportunities across diverse geographies and sectors, infrastructure can be different things to different investors.
If you invest in the project finance side of the business, as another VIP Infrastructure attendee pointed out, you operate in a market where public sector contracts, interest rates and financing durations are the main drivers of infrastructure returns, rather than the price of equity assets and active management as is the case with private unlisted investments.
The examples go on — is infrastructure debt an alternative to fixed income? Yes, say some investors, no say others. Are open-end funds a better match for the long-term hold periods many investors want for infrastructure investments? Yes for some, but no for others. Are investments with ESG commitments infrastructure? The same story — it depends on which investor’s door you go knocking on.
In the listed infrastructure market, meanwhile, 10 years ago the strategy was said by many to not be infrastructure at all because of the volatility that comes with public equities. But now, unlisted infrastructure funds are actually investing in listed infrastructure companies either with non-ownership stakes, or by taking controlling interests with the mind to take these companies private and actively manage the their assets.
Most people like clear answers to questions. But there is no simple answer to the question, what is infrastructure? The asset class is too complex, so the best answer is probably another question: what do you want infrastructure to do for your portfolio? Once that question is answered, the scope of potential infrastructure investments and the vehicles needed to make those investments narrows, uncertainty shrinks and investment decision-making becomes a little less complex.
