At the institutional level, infrastructure investment has grown, and remains attractive due to its secure, often regulated stable cash flow properties, which help match the liability issues facing many of those investors. According to the Organization for Economic Co-operation and Development (OECD), institutional investors in OECD and G20 countries have about $64.8 trillion in infrastructure assets under management. For large investors, most of that ends up in closed-end funds with finite lifespans of about 10 to 12 years.
That trend of infrastructure investment and alternative investing has bled into the arsenal of private wealth managers, who are increasingly looking at asset classes such as real estate, and now infrastructure. A report by Bain and Co. says global investors holding $70 trillion in wealth are the biggest underserved candidates for private alternative assets.
BUYING INTO THE HYPE
Bob Long, CEO of StepStone Private Wealth, calls private wealth managers’ growing interest in infrastructure the “institutionalization of the democratization.” In other words, private wealth managers are becoming more sophisticated with nuanced strategies, consistent with what would be seen by large-scale institutional investors. “Clearly that began with real estate,” he notes. “It was the first to be actively embraced by individual investors and private wealth investors. Private real estate has made it into, in a modest way, 401(k) plans in the United States, while private equity and private credit are still at the nascent stage.”
He further states infrastructure is the next frontier as individual investors recognize their diversification needs to be broader, taking into account additional macro factors. The benefits of infrastructure, with its natural inflation hedge and durability, have become much more obvious for individual investors,” adds Long.
That diversification comes with some reasoning behind it. David Levi, head of Brookfield Oaktree Wealth Solutions, explains the shift into broader markets by infrastructure has grown as product innovations have grown. “In terms of what infrastructure can bring to clients’ portfolios, they include lower volatility, a hedge against inflation and diversification,” says Levi.
He adds the markets are currently in an “infrastructure super-cycle” as there is an increasing need to invest in infrastructure around the world. “Developed economies are burdened with a significant investment required to expand, upgrade or replace aging infrastructure. Developing countries need to build out their infrastructure to support a growing middle class,” Levi explains.
Also, on the capital supply side, traditional infrastructure investors — primarily governments and large corporates — are cash-strapped with high levels of debt and many different demands for their capital, which has left them unable to fund the spending required. This explains why and where private wealth can step in. “Trends such as digitalization, decarbonization and deglobalization offer significant tailwinds to support the infrastructure asset class,” says Levi.
A FOOT IN THE ENERGY-TRANSITION DOOR
Aaron Vale, head of infrastructure client solutions with CBRE Investment Management, notes many large fund managers and direct investors are focusing in on large mega-cap opportunities to access larger assets, such as toll roads, airports and utilities. However, CBRE IM is focusing on “infrastructure 2.0 next-gen” mid-market sectors.
“There’s an amazing investment opportunity set in digitalization, which is the Internet of Things, streaming, 5G and artificial intelligence,” notes Vale. “Humans and societies are on an exponential growth curve in terms of the data we consume … which is a megatrend that creates fantastic investment opportunities,” he stresses. With that, he adds, there are underlying assets such as data centers, fiber and cell towers.
Furthermore, energy transition is another megatrend the firm is focused on. Whether it’s through new or existing facilities, investors who are focused on reducing their carbon footprint can invest in infrastructure assets that support the transition, such as solar power.
“We [also] see a tremendous opportunity in the electrification of transport,” said Vale. “[For example], things like buses that are electric, trucks that are electric and creating the charging infrastructure around that is a megatrend.”
Michael McGowan, head of North American infrastructure private markets with Mercer, agrees with Vale, saying: “[Infrastructure] is easy to sell to retail clients because there are specific themes that you can directly invest in. For example, infrastructure is one of the ways that you can directly participate in the energy transition. You can invest in green-only managers as most global infrastructure funds will have some sort of exposure to renewable energy.”
He adds digitization and data are other areas that can be directly invested in through private wealth managers looking at infrastructure. “It’s a really good diversifier of volatility as well,” adds McGowan. “It has the potential to deliver absolute returns that are correlated to the rest of the market.”
It is interesting to note how investors who favor real estate are now looking at infrastructure as a similar (but different) option for their portfolios. “In my working career, we’ve experienced a long-term secular decline in interest rates, which has created a broad tailwind for real estate,” says Long. “The lesson is a back-to-basics one. Investors have to discern beta from alpha, and that secular trend of declining rates created a massive amount of beta in the real estate industry — at least in the United States. It’s critical to discern the difference, and building on that, we do see a very clear trend of private wealth investors rotating toward infrastructure.”
He says unlike real estate, however, which people seem to understand just by viewing the buildings or property they might be investing in, infrastructure can be subtle. “It’s a more nuanced story that requires [further] education,” explains Long. “It requires education not only on the reward side, but on the risk side, or that infrastructure has potential for lower risk.”
THE OTHER SIDE OF THE COIN
Just like any two-sided coin, infrastructure can be a great investment, but it also can have certain drawbacks for private wealth managers. “While there are hundreds of institutional infrastructure funds, only a small number provide direct access for private wealth,” says Vale. “We see more facilitated access. Open-end [funds] can provide an important access point for private wealth. One of the big constraints for this channel is liquidity, entry points and dealing with capital calls … and only a small subset of those are open-ended funds.”
He also says private wealth can be more fragmented and decentralized than institutional investing, which has its own underwriting capabilities, teams and/or consultants. Also, the end investor/user may have different expectations than a large investor in terms of liquidity and cash flow or fees.
McGowan also says there can be illiquidity within the asset class. It may be that some open-end funds have better liquidity provisions than other closed-end funds. “It’s a great asset, but investors need to be able to swallow the illiquidity versus the [rewards] associated with it.”
As an asset class being considered by private wealth managers, infrastructure is attractive but still very early in its maturation relative to other alternatives, explains Vale. “I think it’s fair to say that infrastructure benchmarking and returns, and the asset class as a whole, is maturing relative to other asset classes. I also would note it’s a very idiosyncratic asset class.
“[For example], a wind farm in Texas is different than a wind turbine in Norway,” adds Vale. “A toll road in Toronto is very different than a similar or kind of toll road in another market.”
There are even differences in entities such as a water utility, where there is likely only one provider in a city, but regulations are different in different markets. “Comparing across regulation, contracts, capital expenditures, and labor — these are operating businesses.”
Education of investors would require a little more time and effort, says Vale.
According to a StepStone white paper, Infrastructure’s Middle Market, An Emerging Opportunity, other challenges include having a significantly larger opportunity set with many more GPs to consider than the large-cap universe. Also, many investors lack the time and resources needed to research and review the myriad of generalists and specialists, or the time needed to conduct diligence on the growing universe of emerging managers.
Despite the challenges, however, private wealth managers appear to be following in their institutional investor brothers’ footsteps when it comes to alternative assets, specifically infrastructure. The rewards of stable, long-term cash flow outweigh the growing pain kinks still being worked out.
Joel Kranc is the head of Kranc Communications, based in Toronto.