Infrastructure Investors Should Brace for Lower Returns

Infrastructure investing is more popular than ever – and more expensive since the 2008 financial crisis.

Rising demand for a limited supply of viable opportunities has pushed prices up, erasing some of the yield that had made infrastructure investments attractive, according to a new report fromCambridge Associates. The average yield for core infrastructure investments tumbled 300 to 350 basis points from 2010 to 2015, raising prices by as much as 40 percent, the consulting firm said, citing JPMorgan Chase & Co. estimates.

Although President Donald Trump has promised to encourage $1 trillion ininfrastructure investments, Cambridge said any new projects would take time to develop, and a “flood of new investment opportunities in the next few years appears unlikely.” Private funds focused on infrastructure already raised a record amount of capital last year globally, possibly setting the stage for a mismatch in in supply and demand.

“Prudent investors looking to allocate to the asset class should ratchet down return expectations relative to the solid performance of years past,” Cambridge said. The number of “projects depends, in part, on local government’s support for privatization, and that support, particularly in the United States, can be weak.”

Institutional investors currently favor “greenfield” projects – building new infrastructure, rather than renovating existing “brownfield” assets – in developed markets, according to the report. The majority of deals are in Europe, followed by North America.

Governments have recognized the crucial role the private sector can play in helping to bridge the large spending gap and investors desperate for yield. And while investors should expect lower earnings compared to recent years, there are still opportunities for the stable, high-income returns that infrastructure investing has become associated with, Cambridge said.

The firm’s global infrastructure benchmark gained 12.5 percent in the 12 months through September, outpacing private investments including natural resources, real estate, and private equity. The benchmark returned 8.9 percent in the five-year period through September, and 7.1 percent over 10 years.

“Of these four private benchmarks, infrastructure had the lowest volatility of rolling annual returns over the last ten-year period, making its risk-adjusted returns more compelling than natural resources and real estate and comparable, though slightly less than, private equity,” Cambridge said in the report.

Within infrastructure, the consulting firm said investors could “still find value in carefully evaluated managers and strategies.”

Cambridge recommends established value-add managers focused on broad mandates rather than specific structures, noting that core infrastructure strategies could prove useful for liability-driven investors. Opportunistic managers might target higher returns, but the reliance on leverage and greenfield projects may prove riskier than is desired, according to its report.

“Established value-add managers, particularly those focused on middle-market opportunities in developed countries, appear best positioned to generate infrastructure’s classic characteristic – stable, high-income returns – with some upside in the years ahead,” Cambridge said.