A common definition for an infrastructure asset is an asset that provides, or facilitates the provision of, essential services that drive economic growth and underpin the day-to-day operations of society. For this reason, we often say that infrastructure assets are “essential services assets”, which means that they are assets that people have to use day-in, day-out.
There are a number of ways to classify infrastructure assets. A way that we often find helpful is to break-down investment by sector. At AMP Capital, we classify infrastructure into four key sectors.
- Transport, which includes airports, roads, seaports and, to a certain extent, logistics.
- Energy and utilities are anything from electricity to gas transmission pipelines and water plants.
- Communications infrastructure is the third and includes telecommunication and broadcast towers and data centres.
- The final category is social infrastructure and private-public partnerships, which are arrangements with governments in which private investors build and operate a facility, and in return the government pays them a fixed quarterly payment.
Due to the nature of the “essential services” they provide, infrastructure assets are often less influenced by economic factors than many other businesses. Infrastructure assets also often enjoy the protection of monopolies, or benefit from high barriers to entry, in the markets in which they operate. This means that the level of competitive pressure they face is often more subdued than traditional companies.
In our view, these key characteristics of infrastructure assets can offer investors several benefits including:
- Attractive risk-adjusted long-term returns, with relatively low levels of volatility;
- Consistent long-term income yields, which can often be linked to inflation; and
- Portfolio diversification, as infrastructure assets tend to have relatively low correlation with other asset classes.
As a result of infrastructures unique characteristics and the benefits it can offer, it is easy to understand why most key institutional investors have meaningful allocation to infrastructure within their overall investment mix.
Listed versus unlisted infrastructure
Broadly, there are two ways to access the asset class, through listed infrastructure and unlisted infrastructure investments. Both of these approaches invest in the same types of underlying assets, so theoretically we would expect them to have similar risk and return profiles in the long run.
But the way that investors access an investment does have an impact on risks and benefits.
In listed infrastructure, investors can build a diversified portfolio in a short amount of time because the assets are very liquid. The downside to that liquidity is that investors are more exposed to market volatility, including speculative trading.
Also, when investors invest in a listed stock they don’t normally have much control or influence over an asset.
In the unlisted infrastructure space, assets are generally held long term by large investors, and valued periodically by independent valuers. And when they are valued – when there’s a significant change in circumstance, or at least every six months – a well credentialled independent valuer provides a long-term view and a valuation range. Consequently, we believe this long-term approach typically results in lower levels of volatility.
Another advantage in the unlisted space is the ability to influence decisions. Typically, when investors buy in the unlisted space, they are taking a significant stake. At AMP Capital we aim to have negative control at a minimum (i.e. enough seats at the board to veto key business decisions), if not majority control.
In AMP Capital’s case, buying into unlisted infrastructure assets allows us to work with management and harness our experience to drive outcomes from the asset.
However, there are limitations in the unlisted space. Unlisted infrastructure is not as liquid as listed infrastructure and, in our experience, a sale or acquisition process can take anywhere from three to six months, or more. As a result, it takes a lot longer to build a portfolio, and to sell a portfolio.
Also, investors need a significant amount of capital to meaningfully invest in the unlisted space. Institutional investors play in this space and deals are in the tens or hundreds of millions of dollars. At the top end they are measured in billions of dollars.
Both listed and unlisted infrastructure have their pros and cons. But investors don’t have to choose one or the other. They can buy into managed funds which are split, holding some of each.
In our view, the correlation between listed and unlisted infrastructure is low enough that there’s good diversification benefits from having the two in the same portfolio.
How has the economic slowdown hit infrastructure?
Transport has been one of the hardest hit sectors and that’s because of travel restrictions due to COVID based lockdowns. Airport traffic has been significantly reduced, and it’s notable that the pandemic is unusual in that it has affected all airports around the world.
In previous slowdowns, such as the global financial crisis and the SARS outbreak, there was a recovery in passenger numbers within a year or two1.
In the case of Australian airports, we expect domestic passenger numbers to recover to 2019 levels around 2023, while international travel will ramp up more slowly. We don’t think 2019 levels will be reached again until 2027 in that part of the market.
It depends on the vaccine rollout and how people learn to live with COVID but there is potential that air traffic exceeds our expectations and if so, there’ll be upside to our forecast asset values.
However, there are some sectors of infrastructure that have been less affected. The social infrastructure sector, and public-private partnerships are examples. These projects tend to involve “availability payments”. If key performance indicators are met in the contract, investors get a fixed payment from a counterparty, typically a state government.
They aren’t impacted by passenger numbers and or changes in economic growth. These types of assets have done exactly what they were supposed to do – provide a steady, less volatile income stream.
There are also infrastructure assets that have outperformed during the COVID crisis. Digital infrastructure is an example – including data centres, fibre optic networks and mobile towers. COVID has accelerated the trend of digital interaction across society as a whole.
Opportunities among infrastructure assets?
Digital infrastructure assets are popular at the moment, given their appreciation during the COVID crisis. The question arises about whether they have run too hard. Are they still worth investing in?
Many digital infrastructure assets still have a strong growth profile, but they have moved higher up the risk spectrum. Like any sector there are opportunities that are more attractive, but our approach has always been to build a diversified portfolio.
Having said that there is much greater demand for data centres and fibre networks and that means there are opportunities.
Data centres are a global market. Once customers commit to the cost of switching to a data centre, which can be surprisingly expensive, the data centre business can start to exert some monopolistic characteristics.
Of course, investors need to consider other factors such as length of contract, the counterparties using the data centre and their reliability, as well as switching costs.
Away from digital infrastructure, there are also opportunities in transport. As people better learn to live with COVID, there will be opportunities in transport infrastructure. In our opinion, people will still want to travel though it will depend on other factors such as vaccines, and vaccine passports, but it is an interesting space to watch.
From what we have seen, the lower risk social and public-private partnership assets have proven their worth during the pandemic and we expect they will continue to generate stable returns through different economic impacts.
There will also be opportunities emerging from governments, via privatisations. Globally government balance sheets are strained, yet they need to be delivering on improved infrastructure.
That’s an opportunity for the private sector.
1. AMP Capital
Subscribe to Market Watch using the form below to receive all of my articlesRory, Shapiro, Associate Director
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