Institutional investors jostling one another this year for a toehold in existing power plants or toll roads — in search of the steady, reliable yields sovereign bonds used to provide — might want to rethink their reluctance to invest in new ones instead.
That's the contention of some industry analysts, even as a growing number of investors focus on the bond-like charms of so-called brownfield infrastructure, with little apparent appetite for the added risks — in construction delays, cost overruns or uncertain demand forecasts — that can bedevil the new greenfield projects.
With demand for those core assets increasingly outpacing supply, that could be poised to change.
In a recent interview, Frederic Blanc-Brude, director of the infrastructure research institute launched in Singapore three months ago by Paris-based EDHEC Business School, said a soon-to-be-published EDHEC survey of roughly 90 asset owners and 90 managers of infrastructure assets suggests greenfield investments might be on the cusp of becoming more mainstream.
The survey found allocations to core, developed markets brownfield infrastructure remain the prime focus for asset owners and managers.
However, a substantial 30% of asset owners cited greenfield projects with long-term contracts or rates of return set by government agencies as “very attractive” or “rather attractive” investment targets — a level of interest greater than the managers surveyed had predicted, said Mr. Blanc-Brude. The research was sponsored by the Global Infrastructure Hub, established by the G-20 to promote investment in infrastructure and policy initiatives supportive of infrastructure.
Some analysts pointed to the prices investors have paid recently for exposure to high-profile brownfield investments in Australia and the U.S., at 30 times prospective cash flows, as evidence of overheating — with the caveat that that judgment could prove premature depending on how long the current low-yield environment lasts.
The growing ranks of institutional investors looking for “long-duration trophy assets” with cash flows to match their liabilities have left core brownfield assets significantly more expensive now than they were five to six years ago, said David Rae, Auckland-based head of investment analysis for the NZ$29.6 billion ($20.4 billion) New Zealand Superannuation Fund.
Those relative newcomers, focused on the “very bottom of the risk curve,” are pricing many veteran infrastructure investors in Australia — with average allocations of around 6% to 7% — out of the core brownfield market, said Peter Siapikoudis, senior consultant and head of infrastructure with Melbourne, Australia-based consulting firm Frontier Advisors.
In contrast to the private equity focus of earlier investors, the new actors buying infrastructure now want “something that won't tank when the next financial crisis comes,” Mr. Blanc-Brude said. And if valuations appear aggressive to many old-timers, “people who believe that interest rates will remain very low for a long period of time” can justify buying at these levels, he said.
That dynamic poses a unique challenge for Australian retirement funds — many with investment portfolios growing 20% a year on the back of mandated employer contributions in Australia of close to 10% of salaries — in maintaining their current levels of exposure to infrastructure.
Frontier Advisors and its clients have responded by “working hard to stay out of public auctions” as much as possible, Mr. Siapikoudis said. In a huge global infrastructure market, there are still “many, many opportunities outside of those auctions” that are small enough to be off the radar screens of bulge-bracket asset owners and in need of skilled managers to deliver on their potential, he said.