Infrastructure is coming of age as an institutional asset class — a process that's not without growing pains, market veterans say.
The asset class continues to see a pickup in interest on the back of relatively strong returns.
The benchmark index for global unlisted infrastructure equity assets launched June 7 by Singapore-based EDHEC Infrastructure Institute showed returns for the year through March 31, including leverage, of 11.6%, slipping from annualized three-year returns of 12.6% and five-year returns of 14.1%.
But the definition of infrastructure has evolved a lot in recent years, raising concerns among some asset owners.
Isabelle Demir, head of real assets with Melbourne-based investment consultant Frontier Advisors Pty. Ltd., said one school of thought now maintains that, with core infrastructure looking very expensive, some managers are going into sectors that fit more naturally under the banner of private equity than infrastructure.
That blurring of the lines has come as the biggest asset owners are increasingly fielding dedicated teams to manage their allocations to infrastructure.
For large limited partners over the past five years — including sovereign wealth funds and big pension funds — infrastructure has graduated from being an "orphan," situated somewhere within real assets or private equity, to a "very established asset class" in its own right, said Kevin Lu, Singapore-based partner and chairman, Asia, with Partners Group AG, a Baar, Switzerland-based private markets manager with roughly $10 billion in infrastructure assets.
According to EDHECinfra, the market capitalization of its global unlisted infrastructure equity benchmark came to $348.4 billion as of March 31 — for a representative selection of 500 private infrastructure companies or vehicles out of a broader universe of 5,000.
Even so, compared to other asset classes, infrastructure investments continue to offer "a very broad range of return and risk," from steady, bond-like investments to more private equity-like returns, said Mr. Lu.
Danny Latham, a Sydney-based partner, infrastructure investments, with Colonial First State Global Asset Management - known outside of Australia as First State Investments - expressed sympathy with those concerned that the market now is seeing some of the same style drift that preceded the global financial crisis of a decade ago.
Whether it's the definition of infrastructure or a question of leverage, some people have been left saying "here we go again," he said.
Others, however, note that some of that style drift simply reflects changes in underlying infrastructure markets now.
"The definition of infrastructure is evolving," and — to the extent that reflects pressure on returns pushing people into new areas — that's making investors "very nervous," said Ross Israel, head of Brisbane-based Queensland Investment Corp. Ltd.'s A$11.3 billion ($7.8 billion) global infrastructure business. But "investors need to be somewhat careful … because some underlying (infrastructure) sectors are evolving, in terms of the way they've traditionally operated," offering up new opportunities which could falsely be interpreted as style drift, he said.