A growing mountain of capital is sitting on the sidelines in private infrastructure funds, waiting to find suitable assets for investment. We discuss how this backlog of demand could benefit listed infrastructure companies.
Ben Morton: As you know, a lot of money has been raised in the infrastructure space over the past several years, much of that dedicated to private infrastructure vehicles. There’s a limited number of infrastructure investment opportunities that these vehicles are now competing for, and what we’ve seen over the past couple of years is, again, heightened competition and therefore falling returns for private infrastructure funds.
Notably, over $150 billion of dry powder is sitting on the sidelines, looking to be invested in infrastructure assets. When we say ‘dry powder’ this is money that has been raised by private infrastructure funds but has yet to be invested, with their own underlying investors pressuring them to get money invested, such that they can earn the returns that they have been promised.
What’s interesting about that is, again, not a lot of assets that are currently available for them to invest in—I should say a finite number of assets that are available to invest in—therefore increasing competition as all these private infrastructure funds and private infrastructure vehicles are looking to get their money in the market. What we’ve seen more recently is a decline in expected returns from private infrastructure vehicles, due to this enhanced competition.
The result of this has been elevated valuations in terms of the multiples that are being paid by private infrastructure vehicles when investing in infrastructure assets. What we show is that private funds are paying, on average, 19 or 20 times year-ahead cash flows. Why is that interesting and relevant to us, as investors in listed infrastructure securities? The average listed infrastructure security trades at around eleven and a half times year-ahead cash flows, ev/ebitda multiples, implying a significant gap between the valuations paid by private entities, and those reflected in listed markets.
We’d point to the performance characteristics, which are differentiating over time: equity-like returns, with materially lower standard deviation than broader equity markets, and I think most importantly in today’s complex investing environment, attractive downside capture, or downside protection. When equity markets are down, infrastructure is down roughly 50 to 65% of the equity market decline.
We believe these characteristics are attractive for investors looking to diversify, particularly in today’s uncertain market environment.
“Private Infrastructure Dry Powder”
Source: Preqin, Goldman Sachs, Cohen & Steers. Dry powder, as defined by Preqin, represents capital committed to all private equity infrastructure funds, less any amount that has been called by the general partner for investment, as reported by the funds.
“Private Transactions Occurring at Premiums”
Source: Dow Jones, MSCI, FactSet. EBITDA is earnings before interest, taxes, depreciation and amortization. EV/EBITDA is shown based on current fiscal-year estimates. Private infrastructure transactions include recent sales of toll roads, airports and gas distribution in the U.S. and abroad, sourced from Goldman Sachs, Bloomberg, Company Reports and Cohen & Steers.
“Global Listed Infrastructure vs. Global Equities”
Source: Dow Jones, Cohen & Steers. Date range represents common period of available data. Standard deviation measures variation from the average, often used to represent volatility. The upside/downside capture ratios illustrate whether a given asset class has outperformed a broad market benchmark during periods of market strength and weakness, and if so, by how much.
Global Listed Infrastructure represented by the Dow Jones Brookfield Global Infrastructure Index, a free-float-adjusted market-capitalization-weighted index that measures performance of globally domiciled companies that derive more than 70% of their cash flows from infrastructure lines of business.
Global equities represented by the MSCI World Index, a free-float-adjusted market-capitalization-weighted index designed to measure the equity market performance of developed markets and is net of dividend withholding taxes.
Data quoted represents past performance, which is no guarantee of future results. The views and opinions in the preceding commentary are as of the date of publication and are subject to change without notice. There is no guarantee that investors will experience the type of performance reﬂected in this commentary. There is no guarantee that any historical trend illustrated in this commentary will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that a market forecast made in this commentary will be realized. This material represents an assessment of the market environment at a specific point in time and should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or take into account the specific objectives or circumstances of any investor. Please consult with your investment, tax or legal adviser regarding your individual circumstances prior to investing. We consider the information in this commentary to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of suitability for investment.
Before investing in any Cohen & Steers U.S.-registered open-end mutual fund, carefully consider the investment objectives, risks, charges, expenses and other information contained in the summary prospectus and prospectus, which can be obtained by visiting cohenandsteers.com or by calling 800 330 7348.
Risks of Investing in Global Infrastructure Securities
Investments in global infrastructure securities will likely be more susceptible to adverse economic or regulatory occurrences aﬀecting global infrastructure companies than an investment that is not primarily invested in global infrastructure companies. Infrastructure issuers may be subject to regulation by various governmental authorities and may also be aﬀected by governmental regulation of rates charged to customers, operational or other mishaps, tariﬀs, and changes in tax laws, regulatory policies, and accounting standards. Foreign securities involve special risks, including currency ﬂuctuation and lower liquidity. Some global securities may represent small and medium-sized companies, which may be more susceptible to price volatility than larger companies.
Cohen & Steers Capital Management, Inc., (Cohen & Steers) is a registered investment advisory firm that provides investment management services to corporate retirement, public and union retirement plans, endowments, foundations and mutual funds.
Cohen & Steers U.S.-registered open-end funds are distributed by Cohen & Steers Securities, LLC, and are available only to U.S. residents.
Cohen & Steers UK Limited is authorized and regulated by the Financial Conduct Authority (FRN 458459).
Cohen & Steers Japan, LLC, is a registered financial instruments operator (investment advisory and agency business with the Financial Services Agency of Japan and the Kanto Local Finance Bureau No. 2857) and is a member of the Japan Investment Advisers Association.