Infrastructure funds, particularly those focusing on non-traditional assets, are showing resilience in a volatile market. Yet according to research by Deloitte, many fund managers are missing the best opportunities.

The survey of 18 infrastructure funds from Europe, Australia, South East Asia and North America investing in the UK and Europe showed most remain conservative, favouring the stable and predictable long-term cash flows generated by traditional infrastructure assets.

The majority of fund managers indicated they intended in the next two years to invest in traditional areas such as airports, toll roads, and regulated utilities, despite non-traditional assets offering better opportunities. This investment strategy is pushing up pricing in western Europe and the UK.

The research shows “less traditional assets such as waste, renewables and telecommunication infrastructure sectors look set to benefit from infrastructure fund investment in the next two years”, says James Riddell, infrastructure partner at Deloitte.

“Those funds prepared to move outside their comfort zone, whether it is tangential infrastructure assets [such as petrol stations on motorways], greenfield infrastructure investments or in geographies with greater sovereign risk, may be able to grab a bargain before the rest of the pack catches up,” he says.

The survey suggests reduced liquidity from increasingly cautious lenders unwilling to consider the opportunities at present is playing a part in holding back investors, such as global pension funds, from moving to non-traditional areas.

Moving outside the comfort zone is not part of the plan at Infracapital Partners, the infrastructure fund of Prudential, managed by M&G. “Investors are attracted to the safe end of the market at the moment,” says Ed Clarke, fund manager. “We are focused on western Europe and we’re more at the conservative end of the spectrum.”

“Our investors are looking for low risk, non-correlated index linked products with predictable returns over a period.” Typical areas he focuses on are gas and water utilities, airports, roads and bridges and some waste management, which he regards as low risk. Infracapital Partners was part of a consortium that recently acquired Kelda Group, owner of Yorkshire Water.

Mr Clarke maintains investors looking for more risk would go for alternative assets and says rival funds have a similar mandate in the current uncertain
climate.

Neil King, a partner in the infrastructure team at 3i, the private equity firm, agrees infrastructure investors are primarily looking for “long-term predictability of cash flow” and “low risk investments in developed markets”, but says 3i is nevertheless setting up an infrastructure fund in India – where it sees opportunities – with capital raised from international investors. 3i’s primary focus is North America, Europe and Asia, investing in the traditional areas of infrastructure.

Many fund managers are not closed-minded about investing in the less traditional side of the sector where there are good assets but “it is higher up the risk path”, says Jason Zibarras, head of JPMorgan’s infrastructure group in Europe. However, he maintains there is even less data available relating to non-correlation with other assets in this field than in more traditional areas.

Fund managers identified western Europe, North America, India and China as the most attractive markets, and most of them believed that emerging markets such as Asia, central and eastern Europe and South America will remain under-invested in the short term despite good opportunities. Africa was viewed as the least attractive area to invest.

The number of infrastructure funds in the market has expanded, from fewer than 10 in 2003 to 40. They are also playing a more significant role in global M&A. The survey indicates that over the last two or three years, funds entering the UK and European market have raised in excess of €20bn (£16bn, $32bn) in new equity capital. Fund managers say infrastructure has also become better understood by investors in the last 10 years as the asset class continues to develop.

Mr Riddell expects new funds to start moving towards wider jurisdictions in the next few years when they become more established. In that period more assets across a wider range of countries are expected to come to market as governments struggle with the burden of developing infrastructure. Among these are tollroads in Turkey, and Prague airport in eastern Europe, both of which investors are likely to eye with interest.

The UK has led the way in selling off assets in the sector, such as the sale of BAA, the airports operator, to Ferrovial, the Spanish conglomerate, while other countries have been dragging their feet.

In the future, Mr Riddell expects more fund managers to be taking an interest in infrastructure in Asia, in countries such as Vietnam, as well as eastern Europe.

A shift of ownership of infrastructure assets from municipalities to private investors in the US is
also expected to generate
interest.

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