It’s a dismal time for fixed-income investors. Negative yields are rampant. German 10-year yields recently fell below zero for the first time ever and Japanese 10-year yields have dipped to record lows. All told, more than $10 trillion in government debt has negative yields today. Some pundits believe that U.S. yields might not be far behind. The U.K. vote to leave the European Union has only made this picture more complex.
What is an institutional investor — who must find a way to make good on long-term promises in what looks like a very low-yield environment for the foreseeable future — to do?
The answer comes from some of the most successful institutional investors: It is time to “reframe their time frame.” This means that instead of thinking about short-term yield, institutional investors should think about time. Investors should ask themselves: If you need to allocate some funds to the 40-year bucket, what should those assets be? Once the question is reframed that way, the answers can begin to look quite a bit different.
The most important outcome of this shift in perspective is that investments in long-term infrastructure can start to look much more attractive and strategic. Once an investor decides to get into this sector, the question becomes at what stage to invest: “up and running” or early stage? The problem is, once a piece of infrastructure is up and running, many investors that want real assets compete to buy it. Since there are more real-asset-seeking investors every day as yields in public equity markets become ever more volatile and yields in debt markets dry up, the prices of “up and running” assets go up and yields go down as well.
Get in early
To succeed in the infrastructure game, therefore, institutional investors must get in earlier. In most infrastructure businesses, the bulk of the “value added” occurs very early. Whoever succeeds at getting infrastructure project development from the drawing board to the successful conclusion of the permitting process will ultimately earn 10% to 12% stable returns because most infrastructure will be financed by long-term contracts. These returns, however, will not accrue to the institutional investors who buy the projects when they’re “up and running.” They will instead be earned by the investors brave enough and smart enough to back the projects at their invention and early development.
To many institutional investors, “development” is a four-letter word. It is time to reframe that attitude. Investment in early stage development is the only way to get to the level of earnings that institutional investors need to pay their long-term obligations.
Ed Krapels is founder and CEO of Anbaric, an electricity infrastructure development company focused on upgrading and enhancing the U.S. power grid in Wakefield, Mass.