Institutional Real Estate, Inc., parent company of this magazine and six other titles, hosted a roundtable meeting in New York City with a cross section of executives from the infrastructure investment market, including U.S. and global pensions, funds of funds, placement agents, infrastructure investment managers and consultants.

The purpose of the meeting was to give participants and Institutional Investing in Infrastructure readers a glimpse into the current state of the market. The discussions included 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. Below are some of the meeting’s highlights:

• U.S. investors have been laggards in private 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, as there are now mega-funds, middle-market strategies, global funds and sector funds. Twelve years ago there were two handfuls of infrastructure managers, and they all had the same type of strategies.
• It is important for infrastructure investors to manage their capital structure and understand what kind of debt they have in their portfolio, because investors do not want to get caught in a rising interest-rate cycle without the necessary cash flows to service their 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, GDP and inflation will not be there to support those assets, and they will eventually experience negative effects.
• 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.

Drew Campbell (d.campbell@irei.com) is senior editor of Institutional Investing in Infrastructure.