The Listed Infrastructure Opportunity
By Charles Hamieh, Shane Hurst & Nick Langley, Managing Directors, Portfolio Managers, ClearBridge Investments
For investors looking to achieve stable, long-term inflation-linked absolute returns, the infrastructure asset class can provide attractive characteristics. Having emerged as a stand-alone asset class, infrastructure has received sizeable allocations from many large institutions, mainly to private market transactions and unlisted infrastructure funds.
As over the past five years the weight of funds flowing into this relatively young asset class has grown dramatically, the increasing demand for unlisted infrastructure assets has not been met by an equivalent increase in the supply of suitable opportunities. As a result, listed infrastructure is an alternative option for capital deployment in the asset class.
According to Preqin, $98 billion was raised in 2019 from investors through 88 fund closures (including the two largest infrastructure funds ever closed). Dry powder at the end of 2019 was $212 billion, more than double at the end of 2015. As 2020 began, there were 253 funds reported in the market, targeting more than $200 billion.
Growing demand and constrained supply – combined with stimulatory monetary settings – have exerted significant downward pressure on available returns. Capital deployment in unlisted infrastructure has become increasingly challenging.
The opportunity set is large: depending on how broadly infrastructure is defined, there are $20-$50 trillion of infrastructure assets globally. Most are publicly owned and not available to private investors. Roughly $7 trillion of infrastructure assets are privately owned, and listed accounts for 70% or $5 trillion of asset value (around $2.5 trillion of equity value). Subsectors include:
· Community and Social assets – schools, universities, hospitals and government facilities that help deliver social services
· Regulated assets – water, electricity and gas transmission and distribution, for which a regulator determines the revenue a company should earn on its assets
· User Pays assets – rail, airports, roads and telecoms towers that move people, goods and services. Pricing, volume and revenue are determined by how many people use them
· Competitive assets – telecommunication and utility retailers
Community and social and competitive assets are generally available only in the private, unlisted market. The listed infrastructure market, however, provides much more depth in regulated utilities and user pays assets – high-quality core infrastructure assets that are more liquid.
Differences in risk exposures for listed and unlisted can lead to different performance. These universes are not substitutes, but complementary. Discerning subsector and risk exposures can help investors improve portfolio construction efficiency and control unintended biases or risks.
Whether an infrastructure investment is held in a listed or unlisted form, the key driver of asset-level risk and returns is regulation. The returns “allowed” by the regulator are a critical driver of long-term asset-level returns. The operating conditions or constraints imposed by the regulator are key ongoing risks to be managed or mitigated.
Taking advantage of the listed infrastructure opportunity requires a detailed understanding of the underlying assets. Well-informed investors can capture the opportunities that arise when equity markets misprice infrastructure assets due to a focus on short-term information. Regulation and contractual structures underpin the cash flows, which determines long-term outcomes.
Historically, listed infrastructure offers a broad and deep investment universe of high-quality stocks. It also provides investors with flexibility to choose or amend their investment horizons. They can tailor liquidity preferences, adjust sensitivity to short-term price volatility and choose their underlying asset risk exposure. Listed has performed consistently with unlisted infrastructure over the longer term, reflecting the stable, inflation-linked performance characteristics of the underlying assets.
Investors who prioritize the flexibility to move among sectors, regions and market cap spectrums could be well-positioned to make the most efficient use of this market.
Charles Hamieh, Shane Hurst & Nick Langley are Managing Directors and Portfolio Managers at ClearBridge Investments, a subsidiary of Legg Mason. Their opinions are not meant to be viewed as investment advice or a solicitation for investment.
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