Debate participants
AC, State Street How would you define infrastructure? Is it a definable asset class or is it a subset of other asset classes?
RC, ABP Initially, because of the lack of historical data, our research department at ABP had difficulty deciding if infrastructure had different enough risk and return characteristics to call it a separate asset class. But because we didn’t want this to hold us back, we started by investing in infrastructure under the umbrella of what we call strategic real estate, because they share a lot of the same characteristics. Since then we have decided to treat it as a separate asset class in our allocation process, because it does have different characteristics; it has stable cashflows, and it’s less dependent on economic cycles than, for example, real estate.
PW, Henderson There is a tendency to define infrastructure by its characteristics and how the investments perform. We use a simple economic definition – quasi-monopolies, with regulated or government-backed income streams, and relatively low risk – as opposed to the classic definition based on what infrastructure does and the services it provides, for example, roads, ports, airports and other basic facilities to support an economy. I’ve only ever seen two or three efficient frontier analyses done on the performance of infrastructure, so it is difficult to get hard data. It’s also difficult to correlate it with other things. It doesn’t perform like equities and it doesn’t perform like fixed interest, but it does have some characteristics that are similar to some types of fixed-income instruments. And it does have some property-like characteristics as well.
CM, Standard Life We focus on infrastructure project bonds, and define it as covering two broad sectors. The first is the more traditional non-recourse project finance. This is quite often energy, but can be roads and PFI projects. It’s usually a contractually driven single asset but that can also include market risk projects. The second is the infrastructure, like water companies, or the BAA potentially, where it’s more of a proper company, with a defensible, potentially monopoly-like, more stable revenue stream, although there’s more operational risk, more management risk, and strategic risk. These can have similarities to another asset class, whole-business securitizations, such as pub and hospital securitizations. You might not think of pubs as a traditional infrastructure asset, but in many ways the techniques used for doing pub securitizations are also applied to ports, for example.
PW, Henderson You can look at the investment opportunities like that as well, there are two types of infrastructure fund which overlap: those generally investing in non-recourse project finance, private finance initiatives (PFI) and public-private partnerships (PPP); and those investing in much broader infrastructure – airports, ports – assets which have different operational business characteristics. They are certainly different from the debt side but also from the equity and the equity risk point of view as well. At the moment you’re seeing a growth in investor interest coming partly from traditional private equity – where they have a shortage of deals at the right sort of prices – drifting into the more operational business-like area of infrastructure. So it’s a combination of the fact that funds are targeting infrastructure with private equity characteristics and that there’s equity capital available to do it as well.
HM, ABN Amro In our minds, infrastructure equity fits within alternatives slotted between private equity and real estate, reflecting investors’ return expectations in the light of risks taken. I also find the debt element quite interesting, because many projects and assets only have a chance of being financed in the public debt markets either by way of an investment grade rating, or by getting a monoline wrap. Unless you have a public debt rating, you drift into the bank market to raise funding. And in the bank market, project financing is more tightly priced than would be the case with high-yield investments, which otherwise have similar risk characteristics.
AC, State Street Is this creeping definition problematic when you’re talking to investors?
PW, Henderson It depends on who the investors are. The more sophisticated investors are looking for sectors where they believe there’s an arbitrage, a gain, where risk and reward is potentially mispriced to a degree. So for certain types of existing long-term investors, it’s probably been advantageous that infrastructure was not an easy sector to define or analyse ...
HM, ABN Amro ... because it restricted the supply of capital.
PW, Henderson Exactly. And so some investors took advantage of that, just as early entrants into other forms of private equity did. When information becomes more widely held you lose that type of advantage.
CM, Standard Life From a debt perspective it only becomes problematic when people use the term infrastructure as a way of imputing regulatory or revenue stability to assets that in fact aren’t stable. And as it becomes popular with a wider choice of assets under the infrastructure umbrella there is a risk that people might confuse more risky assets with traditional infrastructure.
RC, ABP Because we have a top-down approach in our asset allocation, risk characteristics are very important. We don’t like to allocate money to infrastructure with certain risk characteristics and then find that we have invested in private equity. We are not against private equity, but that’s a different allocation. Funds have to do what they say.
HM, ABN Amro Another way of defining infrastructure is to look at it from the perspective of the investor – they see this asset class as a means to match long-dated liabilities with fairly secure cashflows of corresponding assets with a long life. By that definition, assets where the volatility of cashflows is too high for them to qualify as matching assets for those liabilities don’t amount to infrastructure.
Arbitrage returns
AC, State Street What arbitrage should you be capturing by investing in this asset class?
