Future Returns: Investing in Private Infrastructure
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Future Returns: Investing in Private Infrastructure

The sector also is expected to continue growing given the considerable global needs.

By ABBY SCHULTZ
Wed, Aug 18, 2021 11:54amGrey Clock 4 min

The amount of financing required for global infrastructure projects is estimated by McKinsey & Co. to be US$3.7 trillion annually through 2035—a daunting figure, but one that creates potential opportunities for wealthy investors.

That’s because investing in infrastructure assets through privately managed funds can deliver higher yields and better potential returns than other asset classes, according to J.P. Morgan Private Bank.

The sector also is expected to continue growing given the considerable global needs in a wide variety of projects, the bank says. McKinsey’s definition of infrastructure includes everything from what traditionally has fit that category—such as roads, bridges, airports, and power-generating utilities—in addition to more “new world” infrastructure, such as data and communications and renewable energy sources.

“Covid accelerated our clients’ understanding of this space, particularly as remote work made data and access to reliable communication essential,” says Kristin Kallergis, the private bank’s global head of alternative investments. It also showed the value of other new world forms of infrastructure, such as education and healthcare facilities.

J.P. Morgan estimated in a briefing for clients that private infrastructure assets have provided annual yields of about 7.2%. One reason is because some infrastructure projects, such as utility assets, are regulated and offer long-term, predictable cash flows, Kallergis says.

In the next 10 to 15 years, private infrastructure assets can realize a potential return of 6.1%, according to a September 2020 analysis by the bank.

Penta recently spoke with Kallergis about why investors may want to think about investing in private infrastructure assets today, and the type of opportunities it pursues.

Searching for Yield

Beginning late last year, J.P. Morgan Private Bank began speaking with its clients about a “reimagined 40%,” referring to the 40% allocation to fixed-income securities in a standard portfolio of 60% stocks, 40% bonds. With interest rates at rock-bottom levels, it was time to think about where else clients could get extra income.

Much of how the bank reimagined this 40% was through investments in private market alternative securities, such as real estate, a select number of hedge funds, and “a big piece was infrastructure,” Kallergis says.

The bank had an infrastructure fund on its investment platform for clients for several years, but with institutional minimums of US$2.5 million or more.

This year, the bank lowered those minimums, realizing that even the wealthiest of families interested in investing in infrastructure might prefer to start small to learn the asset class and to see how it performed, she says. The strategy worked.

“This year alone, we quadrupled the flows in that fund,” Kallergis says.

How to Invest in Private Infrastructure

For wealthy clients, there are four basic strategies for infrastructure investing, ranging from “core” funds, which have predictable cash flows that can be forecasted for a decade or more, to “core-plus” funds, which have those predictable cash flows but have some riskier element to them, Kallergis says.

For instance, core-plus funds often use slightly more leverage, such as a loan-to-value ratio of about 50%, Kallergis says.

These structures typically require investors to lock up their cash with the fund for two-to-four years, and then semi annually after that. Unlike a private equity fund—which asks investors to put up their committed capital over a period of time—once invested in a core-plus fund, investors have to put in 100% of their capital, Kallergis says. While returns in these funds may be lower than private equity, that 100% of capital begins compounding immediately.

The core-plus funds J.P. Morgan has allocated to for clients have realized net returns ranging from about 7% to 9%, with 6% to 7% of that delivered in yield—making them more of an “income play,” she says.

Value-added funds include assets that are more exposed to market-price risks and/or require “improvements or stabilization,” the bank wrote in a market update on the sector. There are few managers with this approach, however, Kallergis says.

For investors willing to shoulder more risk, there are “opportunistic” funds that are more akin to private equity and can generate net 15% returns.

“You are not getting the cash flow yield in the opportunistic bucket, but similar to how we love opportunistic real estate, we feel the same about infrastructure in terms of what it can add to the portfolio,” she says.

Until recently, most of the opportunistic income funds were invested in emerging market projects. But even for funds invested in great assets, emerging markets pose currency risks, meaning there is potential for everything invested in these funds in dollar terms to depreciate. India and Brazil, for example, have been “places with great infrastructure needs, a great investment thesis—but you had to be mindful of the risk you were taking from a currency perspective,” Kallergis says.

Little Boost Expected from Legislation

J.P. Morgan likes opportunistic funds for the diversity, income, inflation-protection, and yield, or DIIY, they provide.

Diversity refers to the low correlation infrastructure funds have to other sectors of the market, including real estate. The yield, Kallergis adds, is likely to be more and more of a factor in this space as more renewable power projects are financed.

While the nearly US$1 trillion infrastructure bill that passed the U.S. Senate on Aug. 10—and still needs to clear the U.S. House of Representatives—would spur spending on a range of projects, it wouldn’t “change the game for infrastructure investing,” Kallergis says.

What it does is allow more investors to learn about infrastructure and “whether they should have a piece in their portfolio,” she says. Given the great needs in the U.S., “most people are excited about what’s to come.”

Reprinted by permission of Penta. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: August, 17, 2021.



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Global economic growth is becoming more broad based, with surveys indicating that business activity in both the U.S. and the eurozone gained momentum in May.

The eurozone economy contracted in the second half of 2023 following a surge in energy and food prices triggered by Russia’s invasion of Ukraine, and the subsequent rise in interest rates intended to tame that inflation.

By contrast, the U.S. economy expanded strongly over the same period, opening up an unusually wide growth gap with the eurozone. That gap narrowed as the eurozone returned to growth in the first three months of the year, while the U.S. slowed.

However, surveys released Thursday point to a fresh acceleration in the U.S., even as growth in the eurozone strengthened. That bodes well for a global economy that relied heavily on the U.S. for its dynamism in 2023.

The S&P Global Flash U.S. Composite PMI —which gauges activity in the manufacturing and services sectors—rose to 54.4 in May from 51.3 in April, marking a 25-month high and the first time since the beginning of the year that the index hasn’t slowed. A level over 50 indicates expansion in private-sector activity.

“The data put the U.S. economy back on course for another solid gross domestic product gain in the second quarter,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Eurozone business activity in turn increased for the third straight month in May, and at the fastest pace in a year, the surveys suggest. The currency area’s joint composite PMI rose to 52.3 from 51.7.

The uptick was led by powerhouse economy Germany, where continued strength in services and improvement in industry drove activity to its highest level in a year. That helped the manufacturing sector in the bloc as a whole grow closer to recovery, reaching a 15-month peak.

By contrast, surveys of purchasing managers pointed to a slowdown in the U.K. economy following a stronger-than-expected start to the year that saw it outpace the U.S. The survey was released a day after Prime Minister Rishi Sunak called a surprise election for early July, banking on signs of an improved economic outlook to turn around a large deficit in the opinion polls.

Similar surveys pointed to a further acceleration in India’s rapidly-expanding economy, and to a rebound in Japan, where the economy contracted in the first three months of the year. In Australia, the surveys pointed to a slight slowdown in growth during May.

Businesses reported that they were raising their prices at the slowest pace since November, which should reassure the European Central Bank. However, the eurozone continued to add jobs in May, suggesting that wages might not cool as rapidly as the ECB had hoped.

The ECB released figures Thursday that showed wages negotiated by labor unions in the eurozone were 4.7% higher in the first quarter than a year earlier, a faster increase than the 4.5% recorded in the final three months of 2023

The ECB has signalled it will lower its key interest rate in early June, while the Fed is waiting for evidence that a slowdown in inflation will resume after setbacks this year.

Nevertheless, eurozone businesses and households shouldn’t bank on successive cuts to borrowing costs, ECB Vice President Luis de Guindos said. “There is a huge degree of uncertainty,” he said. “We have made no decisions on the number of interest rate cuts or on their size,” he said in an interview published Thursday. “We will see how economic data evolve.”

Continued resilience in the eurozone economy would likely make the ECB more cautious about lowering borrowing costs after its first move, economist Franziska Palmas at Capital Economics wrote in a note. “If the economy continues to hold up well, cuts further ahead may be slower than we had anticipated,” she said.

– Edward Frankl contributed to this story.

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