In New York City this week, IREI hosted a roundtable meeting with a cross section of the institutional infrastructure investment market, including U.S and global pensions, fund of funds, placement agents, infrastructure investment managers and consultants. The organizations present were New York State Common Fund, First State Investments, Partners Group, National Pension Service of Korea, StepStone Group, Upper Bay Infrastructure, IFM Investors, New Jersey Treasury Office and Campbell Lutyens.
The purpose of the meeting was to give participants and i3 readers a glimpse into the current state of the market. The discussions included from the market for energy infrastructure investment, how interest rate policy is affecting infrastructure investing, and how investors can work with U.S. state and municipal governments to partner on infrastructure projects.
In December, Institutional Investing in Infrastructure (i3) magazine will publish a feature-length article summarizing the discussions. In the meantime, below are several of the highlights.
- U.S. investors have been the laggard in infrastructure investing. But the financial crisis highlighted the value of an infrastructure portfolio, as the asset class performed relatively well through the crisis and aftermath. Now U.S. investors are increasingly allocating to the market.
- Infrastructure is becoming a “proper asset class” with segmentation — now there are mega-funds, middle-market strategies, global funds and sector funds; 12 years ago there were two handfuls of infrastructure managers and they all had the same type of strategies.
- It’s important for infrastructure investors to manage their capital structure and understand what kind of debt they have in their portfolio because you don’t want to get caught in a rising interest rate cycle without the necessary cash flows to service your debt.
- Why are interest rates rising? Typically, if GDP and inflation are increasing that will justify interest rate increases, but is that what is happening in this cycle? Or are interest rate decisions being influenced by politics? That is an important distinction that will affect infrastructure assets.
- If rate increases are in fact a response to growing GDP and inflation, then GDP-linked infrastructure such as ports and airports will ride that wave and perform well. But, if rate increases reflect political considerations, then the GDP and inflation won’t be there to support those assets, and they will eventually be some of the most negatively affected.
- Core infrastructure assets are not attractive in the current market due to high demand pushing up prices. Instead of investing in core, the challenge is finding relative value, whether this is accomplished through diversification, or finding a sector that is out of favor and protecting against the downside.