The investment environment for private infrastructure has been challenging—interest rates are high, private-market multiples are elevated and historical hurdle rates are becoming more difficult to attain. At the same time, infrastructure deals in the private equity space have declined, leaving all-time-high levels of dry powder sitting on the sideline.

In our view, holding private capital reserves could lead to missed opportunities, particularly as infrastructure markets continue to be robust, boosted by tailwinds from deglobalisation, electrification and artificial intelligence (AI), which continue to drive electricity demand and investments. Given this backdrop, we believe now may be an opportune time for infrastructure investors to consider incorporating publicly listed infrastructure into their allocations, as either a complement to, or a substitute for, their unlisted infrastructure investments.

Advantages of listed infrastructure

Both listed and unlisted infrastructure offer investors similar characteristics: yield, capital gains, diversification and inflation-linkage. Separately, listed infrastructure has its own distinct set of advantages, including greater liquidity, readily available access to the market, and real-time pricing transparency. The ability to gain immediate exposure to the asset class can be particularly beneficial in this environment given the declining deal activity and long-term risk/return profiles of private infrastructure. Likewise, pricing transparency can be a key factor for investors in determining the true risks of their portfolios.

In a recent blog discussing the benefits of listed infrastructure, we highlighted the asset class’s relatively stable absolute and risk-adjusted returns throughout market cycles, its ability to pass inflationary pressures on to end consumers, and its stable cash flows that can provide downside support in difficult equity-market environments. Through listed infrastructure, investors can gain immediate beta exposure at lower valuations with greater pricing transparency and liquidity, while potentially earning similar returns.

Similar performance profiles

Up to the end of June 2024, indices tracking both listed and unlisted infrastructure posted a similar annualised return over the trailing ten years—the S&P Global Infrastructure Index (listed infrastructure) rose 4.6%, while the EDHEC Infra300® VW Equity Index (unlisted infrastructure) was up 5.2%, with similar risk (15.5% versus 15.4%, respectively).

With a similar risk/return profile, we believe listed infrastructure could provide a compelling solution for investors wanting exposure to the benefits of infrastructure while maintaining liquidity, pricing transparency and instant access to the asset class.

Market access

Private infrastructure has recently experienced a significant slowdown in deal activity. In 2023, fundraising dropped by 39.8% year over year and the number of vehicles reaching final close fell to its lowest level since Realfin began tracking in 1990, down 52%. The number of infrastructure deals declined by 18% in 2023 versus the previous year, and infrastructure merger-and-acquisition (M&A) transactions were down 41%.^2,3 For committed capital to be deployed, the industry needs new infrastructure projects, new M&As and existing infrastructure to be sold to new buyers. If private infrastructure deal activity continues to lag, investors may struggle to find opportunities for putting their committed capital to work.

Meanwhile, dry powder has nearly tripled in less than a decade. A large sum of the 2020-2022 vintages have yet to be allocated to infrastructure projects, according to PitchBook Data, Inc.⁴ In our view, there are missed opportunities here, given that infrastructure equities have risen 30% since the end of 2020 (7.5% annualised).⁵

Infrastructure dry powder ($bn) by vintage

Source: PitchBook Data, Inc. As at 30 September 2023.

The higher interest-rate environment and greater valuation multiples have hindered fresh capital deployment in private infrastructure. Similarly, these challenges have also weighed on the fundraising environment.

Infrastructure fundraising activity

Source: PitchBook Data, Inc. As at 31 March 2024.

In public markets, investors can get instant access to investment opportunities in infrastructure securities, with the additional benefits of liquidity and pricing transparency. In our view, deal activity for existing private infrastructure is likely to remain challenged with record dry powder on the sidelines, owing to the appreciation in private infrastructure valuations over the last decade, combined with higher interest rates. To attract new investors, private infrastructure valuations must compress to listed valuation levels, which would result in lower returns for existing investors. Also, private infrastructure deals for the foreseeable future are likely to be financed at higher interest rates than the deals transacted over the last ten years, which could make historical hurdle rates difficult to attain.

Valuation multiples 

Valuation multiples in private infrastructure began to fall in 2023, partially owing to a downward adjustment in asset owners’ return expectations in the current rate environment. Valuations ended the year with a mean of 15.9 times EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortisation). This is down from 17.8 times in 2022 and closer to the 2018-2022 five-year average of 15.6 times. Realfin predicts a continued downward trend in EV/EBITDA multiples, as “some of these drivers have only just begun exerting their influence on the market.”⁶ We believe this could lead to continued downward pressure on the return outlook for unlisted infrastructure, which has already fallen from their 2022 highs. 

Given its real-time pricing and transparency, we believe listed infrastructure has already factored in the higher rate environment, following a 30% derating from 2021 to 2023; in comparison, private infrastructure experienced an 11% derating from 2022 to 2023. At the end of 2023, listed infrastructure traded at a 30% discount to private infrastructure, the largest discount since 2011, despite its greater liquidity, pricing transparency and ease of access into the asset class.⁷

Over the last ten-plus years, the market environment was favourable for private infrastructure. Investors could take on leverage at very low rates, buy relatively cheap and exit at higher multiples, as multiples generally rose during this period (from 11 times EV/EBITDA in 2010 to 18 times in 2022).⁸ However, with higher interest rates (at around 6%), all-time high levels of dry powder, lower transaction activity and higher multiples (at 16 times EV/EBITDA), private infrastructure investors are currently facing a much more difficult environment and may have to lower their return expectations.

In our view, investors who had committed capital sitting on the sidelines over the last three years may have missed out on investing in listed infrastructure. Of the market’s $380 billion in dry powder, approximately 73% was raised from the start of 2021 until 30 September 2023, according to PitchBook Data, Inc.⁹ The listed infrastructure market has risen 30% from 2021 until July 2024. Given the macroeconomic backdrop, we believe unlisted multiples may continue to decline. At current relative multiples, now could be an opportune time for investors to consider reallocating some of their exposure from unlisted infrastructure to listed infrastructure, to capitalise on the valuation dislocation.

EV/EBITDA multiples

Source: Bloomberg, RealfinX Platform, 31 December 2023.

Liquidity

Whether investors choose to go all in with listed infrastructure or allocate a portion of their infrastructure exposure to the listed market, they may benefit from added liquidity. With dealmaking at a decade low, falling valuation multiples and declining return outlooks, due in part to higher rates, this liquidity provides investors with the opportunity to adjust the duration of their portfolios and access their capital. Furthermore, in these challenging markets, we have seen instances recently of redemption limits being set on private infrastructure assets. In our view, this further underscores the liquidity appeal of publicly listed infrastructure.  

Pricing transparency

Valuing unlisted infrastructure can be challenging, as it is difficult to accurately assess the immediate risk/reward profiles of these assets. We have spoken with numerous valuation accountants and auditors who have highlighted that private infrastructure asset owners are afforded more discretion and subjectivity in their reporting, particularly more freedom to take a longer-term view when valuing their assets. This can enable private infrastructure fund managers to immunise their assets from material decreases in valuation. The lack of transparency can cause investors to misinterpret the true risks of private infrastructure assets within their portfolios, as volatility measures may be subdued by opaque and misunderstood valuation guidelines.

On the other hand, listed infrastructure offers real-time transparency with daily mark-to-market valuations, which we believe provide a more accurate depiction of associated risks. This was evident during the Covid-19 pandemic, when publicly listed equities were down over 30% while private benchmarks were down just 10%. As there are very few fundamental differences between the underlying assets of listed and unlisted infrastructure, we would expect them to yield similar results. However, due to the opacity of private infrastructure reporting, including the lack of visibility into the process and massive amounts of discretion afforded to private infrastructure fund managers, private companies were able to smooth out their reported risks.

Reported volatility for listed infrastructure assets may be higher due to daily mark-to-market pricing, full transparency of underlying risks and the inability of fund managers to underplay risks in their reporting. However, we believe that through a full market cycle the true underlying risks and rewards of private and publicly listed infrastructure are very similar, as evidenced by the similar performance profiles of the EDHEC Infra300® VW Equity Index and the S&P Global Infrastructure Index over the last ten years.

Diversifying into listed infrastructure

At Newton, we value the ability to invest in infrastructure with liquidity and pricing transparency. Private market valuations may continue to contract, and this may drag on the return outlook for private infrastructure, particularly relative to the last decade. For these reasons, and given the macroeconomic regime change over the last few years, we believe now may be an opportune time for investors to consider including public infrastructure in their infrastructure allocations. Diversifying into listed infrastructure may allow investors to generate similar returns while more effectively assessing the risk/reward trade-off in their portfolios.

¹ RealfinX Platform

² BCG Global. 18 March 2024. A bump in the road: Private equity infrastructure investment set to rebound following slowdown in 2023. https://www.bcg.com/press/18march2024-private-equity-infrastructure-investment-set-to-rebound.

³ Realfin. Realfin state of the market report global infrastructure 2024. Accessed 26 June 2024. https://realfinprodstorage.blob.core.windows.net/files/2024_Realfin_State_of_Market_Global_Infrastructure_2.1.pdf?utm_source=Newsletter&utm_medium=email&utm_content=Your+requested+link+to+Realfin+State+of+the+Market+-+Global+Infrastructure+2024&utm_campaign=2024-RSOM-INFRA+auto+responder+%28LinkedIn%29&vgo_ee=tYgLHu%2FNcFOMhVXSkAwUbZ2xjW%2F%2FmBpfsftcfiDUixxku8Omw5k%2F51pdRtxq%2F1MK%3AqJkmYXlRoq3Zl9HjWeykIV6YVDQGCKA9.

⁴ PitchBook. As at 30 September 2023.

⁵ Bloomberg. Accessed 26 June 2024.

⁶ Realfin. Private infrastructure multiples cool in 2023. 30 January 2024. https://www.realfin.com/intelligence/private-infrastructure-multiples-cool-in-2023?utm_source=Newsletter&utm_medium=email&utm_content=Private+infrastructure+multiples+cool+in+2023&utm_campaign=2024-01-31+RWIB-INFRA

⁷ RealfinX Platform

⁸ RealfinX Platform

⁹ PitchBook. As at 30 September 2023.

The investment environment for private infrastructure has been challenging—interest rates are high, private-market multiples are elevated and historical hurdle rates are becoming more difficult to attain. At the same time, infrastructure deals in the private equity space have declined, leaving all-time-high levels of dry powder sitting on the sideline.

In our view, holding private capital reserves could lead to missed opportunities, particularly as infrastructure markets continue to be robust, boosted by tailwinds from deglobalization, electrification and artificial intelligence (AI), which continue to drive electricity demand and investments. Given this backdrop, we believe now may be an opportune time for infrastructure investors to consider incorporating publicly listed infrastructure into their allocations, as either a complement to, or a substitute for, their unlisted infrastructure investments.

Advantages of Listed Infrastructure

Both listed and unlisted infrastructure offer investors similar characteristics: yield, capital gains, diversification and inflation-linkage. Separately, listed infrastructure has its own distinct set of advantages, including greater liquidity, readily available access to the market, and real-time pricing transparency. The ability to gain immediate exposure to the asset class can be particularly beneficial in this environment given the declining deal activity and long-term risk/return profiles of private infrastructure. Likewise, pricing transparency can be a key factor for investors in determining the true risks of their portfolios.

In a recent blog discussing the benefits of listed infrastructure, we highlighted the asset class’s relatively stable absolute and risk-adjusted returns throughout market cycles, its ability to pass inflationary pressures on to end consumers, and its stable cash flows that can provide downside support in difficult equity-market environments. Through listed infrastructure, investors can gain immediate beta exposure at lower valuations with greater pricing transparency and liquidity, while potentially earning similar returns.

Similar Performance Profiles

Through June 2024, indices tracking both listed and unlisted infrastructure posted a similar annualized return over the trailing ten years—the S&P Global Infrastructure Index (listed infrastructure) rose 4.6%, while the EDHEC Infra300® VW Equity Index (unlisted infrastructure) was up 5.2%, with similar risk (15.5% versus 15.4%, respectively).

With a similar risk/return profile, we believe listed infrastructure could provide a compelling solution for investors wanting exposure to the benefits of infrastructure while maintaining liquidity, pricing transparency and instant access to the asset class.

Market Access

Private infrastructure has recently experienced a significant slowdown in deal activity. In 2023, fundraising dropped by 39.8% year over year and the number of vehicles reaching final close fell to its lowest level since Realfin began tracking in 1990, down 52%. The number of infrastructure deals declined by 18% in 2023 versus the previous year, and infrastructure merger-and-acquisition (M&A) transactions were down 41%.^2,3 For committed capital to be deployed, the industry needs new infrastructure projects, new M&As and existing infrastructure to be sold to new buyers. If private infrastructure deal activity continues to lag, investors may struggle to find opportunities for putting their committed capital to work.

Meanwhile, dry powder has nearly tripled in less than a decade. A large sum of the 2020-2022 vintages have yet to be allocated to infrastructure projects, according to PitchBook Data, Inc.⁴ In our view, there are missed opportunities here, given that infrastructure equities have risen 30% since the end of 2020 (7.5% annualized).⁵

Infrastructure Dry Powder ($bn) by Vintage

Source: PitchBook Data, Inc. As of September 30, 2023.

The higher interest-rate environment and greater valuation multiples have hindered fresh capital deployment in private infrastructure. Similarly, these challenges have also weighed on the fundraising environment.

Infrastructure Fundraising Activity

Source: PitchBook Data, Inc. ^*As of March 31, 2024.

In public markets, investors can get instant access to investment opportunities in infrastructure securities, with the additional benefits of liquidity and pricing transparency. In our view, deal activity for existing private infrastructure is likely to remain challenged with record dry powder on the sidelines, owing to the appreciation in private infrastructure valuations over the last decade, combined with higher interest rates. To attract new investors, private infrastructure valuations must compress to listed valuation levels, which would result in lower returns for existing investors. Also, private infrastructure deals for the foreseeable future are likely to be financed at higher interest rates than the deals transacted over the last ten years, which could make historical hurdle rates difficult to attain.

Valuation Multiples 

Valuation multiples in private infrastructure began to fall in 2023, partially owing to a downward adjustment in asset owners’ return expectations in the current rate environment. Valuations ended the year with a mean of 15.9 times EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortization). This is down from 17.8 times in 2022 and closer to the 2018-2022 five-year average of 15.6 times. Realfin predicts a continued downward trend in EV/EBITDA multiples, as “some of these drivers have only just begun exerting their influence on the market.”⁶ We believe this could lead to continued downward pressure on the return outlook for unlisted infrastructure, which has already fallen from their 2022 highs. 

Given its real-time pricing and transparency, we believe listed infrastructure has already factored in the higher rate environment, following a 30% derating from 2021 through 2023; in comparison, private infrastructure experienced an 11% derating from 2022 to 2023. At the end of 2023, listed infrastructure traded at a 30% discount to private infrastructure, the largest discount since 2011, despite its greater liquidity, pricing transparency and ease of access into the asset class.⁷

Over the last ten-plus years, the market environment was favorable for private infrastructure. Investors could take on leverage at very low rates, buy relatively cheap and exit at higher multiples, as multiples generally rose during this period (from 11 times EV/EBITDA in 2010 to 18 times in 2022).⁸ However, with higher interest rates (at around 6%), all-time high levels of dry powder, lower transaction activity and higher multiples (at 16 times EV/EBITDA), private infrastructure investors are currently facing a much more difficult environment and may have to lower their return expectations.

In our view, investors who had committed capital sitting on the sidelines over the last three years may have missed out on investing in listed infrastructure. Of the market’s $380 billion in dry powder, approximately 73% was raised from the start of 2021 through September 30, 2023, according to PitchBook Data, Inc.⁹ The listed infrastructure market has risen 30% from 2021 through July 2024. Given the macroeconomic backdrop, we believe unlisted multiples may continue to decline. At current relative multiples, now could be an opportune time for investors to consider reallocating some of their exposure from unlisted infrastructure to listed infrastructure, to capitalize on the valuation dislocation.

EV/EBITDA Multiples

Source: Bloomberg, RealfinX Platform, December 31, 2023.

Liquidity

Whether investors choose to go all in with listed infrastructure or allocate a portion of their infrastructure exposure to the listed market, they may benefit from added liquidity. With dealmaking at a decade low, falling valuation multiples and declining return outlooks, due in part to higher rates, this liquidity provides investors with the opportunity to adjust the duration of their portfolios and access their capital. Furthermore, in these challenging markets, we have seen instances recently of redemption limits being set on private infrastructure assets. In our view, this further underscores the liquidity appeal of publicly listed infrastructure.  

Pricing Transparency

Valuing unlisted infrastructure can be challenging, as it is difficult to accurately assess the immediate risk/reward profiles of these assets. We have spoken with numerous valuation accountants and auditors who have highlighted that private infrastructure asset owners are afforded more discretion and subjectivity in their reporting, particularly more freedom to take a longer-term view when valuing their assets. This can enable private infrastructure fund managers to immunize their assets from material decreases in valuation. The lack of transparency can cause investors to misinterpret the true risks of private infrastructure assets within their portfolios, as volatility measures may be subdued by opaque and misunderstood valuation guidelines.

On the other hand, listed infrastructure offers real-time transparency with daily mark-to-market valuations, which we believe provide a more accurate depiction of associated risks. This was evident during the Covid-19 pandemic, when publicly listed equities were down over 30% while private benchmarks were down just 10%. As there are very few fundamental differences between the underlying assets of listed and unlisted infrastructure, we would expect them to yield similar results. However, due to the opacity of private infrastructure reporting, including the lack of visibility into the process and massive amounts of discretion afforded to private infrastructure fund managers, private companies were able to smooth out their reported risks.

Reported volatility for listed infrastructure assets may be higher due to daily mark-to-market pricing, full transparency of underlying risks and the inability of fund managers to underplay risks in their reporting. However, we believe that through a full market cycle the true underlying risks and rewards of private and publicly listed infrastructure are very similar, as evidenced by the similar performance profiles of the EDHEC Infra300® VW Equity Index and the S&P Global Infrastructure Index over the last ten years.

Diversifying into Listed Infrastructure

At Newton, we value the ability to invest in infrastructure with liquidity and pricing transparency. Private market valuations may continue to contract, and this may drag on the return outlook for private infrastructure, particularly relative to the last decade. For these reasons, and given the macroeconomic regime change over the last few years, we believe now may be an opportune time for investors to consider including public infrastructure in their infrastructure allocations. Diversifying into listed infrastructure may allow investors to generate similar returns while more effectively assessing the risk/reward trade-off in their portfolios.

¹ RealfinX Platform

² BCG Global. March 18, 2024. A Bump in the Road: Private Equity Infrastructure Investment Set to Rebound Following Slowdown in 2023. https://www.bcg.com/press/18march2024-private-equity-infrastructure-investment-set-to-rebound.

³ Realfin. Realfin State of the Market Report Global Infrastructure 2024. Accessed June 26, 2024. https://realfinprodstorage.blob.core.windows.net/files/2024_Realfin_State_of_Market_Global_Infrastructure_2.1.pdf?utm_source=Newsletter&utm_medium=email&utm_content=Your+requested+link+to+Realfin+State+of+the+Market+-+Global+Infrastructure+2024&utm_campaign=2024-RSOM-INFRA+auto+responder+%28LinkedIn%29&vgo_ee=tYgLHu%2FNcFOMhVXSkAwUbZ2xjW%2F%2FmBpfsftcfiDUixxku8Omw5k%2F51pdRtxq%2F1MK%3AqJkmYXlRoq3Zl9HjWeykIV6YVDQGCKA9.

⁴ PitchBook. As of September 30, 2023.

⁵ Bloomberg. Accessed June 26, 2024.

⁶ Realfin. Private infrastructure multiples cool in 2023. January 30, 2024. https://www.realfin.com/intelligence/private-infrastructure-multiples-cool-in-2023?utm_source=Newsletter&utm_medium=email&utm_content=Private+infrastructure+multiples+cool+in+2023&utm_campaign=2024-01-31+RWIB-INFRA

⁷ RealfinX Platform

⁸ RealfinX Platform

⁹ PitchBook. As of September 30, 2023.

Investing in Asia has historically been focused on growth opportunities by using the region as a play on global gross domestic product (GDP) and export growth.

Instead, we believe more attractive risk and reward characteristics can be found by focusing on income as well as growth in the region.

We advocate diversification into Asia and focus on companies that can continue to pay dividends during times of macroeconomic uncertainty. Dividends play a key role in total returns for Asian investors and are the bedrock of income strategies.

In the new regime of higher interest rates and inflationary pressures, there is likely to be more volatility. As such, we think it is important to be selective within any dividend-focused approach.

Coupled with a change in growth dynamics, investor perspectives on investing in Asia could also be changing. Over the last decade, China’s internet platform companies have become a large part of the benchmark. However, valuations have been affected by regulatory concerns. We think this illustrates one of the pitfalls of focusing only on growth strategies in the Asia region, where valuations are not grounded by dividends.

By way of example, our Asian income portfolios are currently overweight in Singapore, which plays host to many companies with strong balance sheets and decent payout ratios. There is a lot of wealth and trade that goes through Singapore from its neighbouring nations. Banks in the region also have well-capitalised balance sheets and the ability to sustain higher dividends for years to come.

Another overweight is Taiwan, on the basis of opportunities around its many technology companies. We also see merits in Indonesia, which in our view emerged from the so-called ‘taper tantrum’ of 2013 stronger from current account and fiscal perspectives. We see strong growth coming out of that economy and think this is likely to continue.

We also believe India offers significant potential given its long-term demographics, strong consumption and household income growth, as well as growing levels of urbanisation. In other parts of Asia, ageing populations are supportive for income strategies because, as people grow older, there is a greater need for income to fund them in retirement.

Chipping in

On a thematic level, the technology sector provides investment opportunities. We believe artificial intelligence (AI), or more specifically companies supplying the hardware for AI, present interesting opportunities. Many of the technology companies held in our Asian Income strategy have net cash balance sheets and pay dividends, and we expect the AI industry to increase dividends as profits grow in the coming years.

Overall, we are broadly looking for balance-sheet strength, strong business models, and companies that have economic moats that give a competitive advantage. In other words, we favour quality franchises, with a degree of pricing power, which maintain profitability and margins – and pay dividends. Especially with Asia, we think the capital growth component of a portfolio’s total return is more volatile and less dependable than the income component.

By harnessing the potential of dividends and dividend growth, it is possible to compound total returns in a more consistent fashion than by trying to target growth on its own.

A version of this article first appeared on Morningstar.co.uk

Key points:

• Historically, publicly listed infrastructure investments have provided relatively stable absolute and risk-adjusted returns through market cycles.
• Listed-infrastructure securities are typically issued by companies with hard-asset-owning business models in heavily regulated industries, with contracts that allow them to pass inflationary pressures on to their end consumers.
• The stability of cash flows also provides downside support in difficult equity market environments.

Alternative investments are on the rise. These financial assets, which include hedge funds, private equity, real estate, infrastructure, commodities, private debt and liquid alternative mutual funds, accounted for 21% of global assets under management (AUM), or $20 trillion, in 2022. Currently, the growth trajectory for alternatives is second only to passively managed investments, with AUM expected to reach $29 trillion by 2027.¹ 

For investors seeking to allocate to alternative investments, we believe listed infrastructure could be a compelling option. Infrastructure assets are expected to grow at a compound annual growth rate (CAGR) of 11% from 2022 to 2027, ultimately making up 7% of a $29 trillion global alternatives market.² What are the key draws of listed infrastructure in the current environment? Listed infrastructure has historically delivered consistent mid-to-high single-digit total returns, above market yield. Furthermore, these assets may offer downside protection and a hedge against inflation, in addition to favourable long-term risk-adjusted returns relative to equities and other listed alternatives.

Current market environment

Inflation has begun to decelerate across developed economies, leading to a pivot in the expected path of interest rates. At the same time, governments are deploying trillions in global infrastructure funding to support energy-transition objectives and reshoring initiatives and to maintain aging infrastructure. Significant megaprojects, or large-scale projects that typically cost $1 billion or more, are expected to break ground in 2024 to reduce energy dependence and bring semiconductor supply chains closer to home.

Multiple infrastructure sectors, such as utilities and renewable energy, lagged in 2023 due to the rising interest-rate environment, as companies in these industries generally rely on debt markets to fund future growth. As the tide appears to be turning on the interest-rate front, sentiment for listed infrastructure is improving. Against this backdrop, our outlook for listed infrastructure is constructive, and we believe this alternative asset class could unlock opportunities for investors.

Stable returns and inflation protection

As shown below, listed infrastructure has delivered consistent mid-to-high single-digit total returns over the past 20 years, outperforming equities over that time period.³ The characteristics of listed infrastructure, which allow companies within the asset class to deliver income while also protecting against inflation, drive these steady return streams.

Income returns play a substantial role in the overall performance of listed infrastructure. Listed-infrastructure securities are typically issued by companies with hard-asset-owning business models in heavily regulated industries, with contracts that allow them to pass inflationary pressures on to their end consumers. These are typically dividend-paying equities, and as such can generate stable cash flows that similarly keep pace with inflation. Currently, infrastructure equities deliver a dividend yield twice that of global equities, as depicted below.⁴

The US inflation rate year over year has increased 3% or more during seven of the last 20 calendar years. During these seven years, listed-infrastructure equities have appreciated an average of 12.4%, versus global equities which have appreciated 7.5%.⁵ Likewise, infrastructure assets have been favourable investments historically when rates drop. US rates have fallen in 10 of the last 20 years, and in those 10 years, infrastructure has returned an average of 8.6%, while global equities have returned 7.7%.⁶

Annualised returns (Total return annualised month end)

Dividend yield

Downside protection and risk-adjusted returns

The stability of cash flows can also provide downside support in difficult equity market environments. Over the past 20 calendar years, the MSCI ACWI Index—which comprises large-cap and mid-cap equities across both developed and emerging markets—has dropped five times. In these down-market environments, listed infrastructure has fallen an average of 12.1%, as compared to global equities which have declined an average of 15.9%.⁷ This is evident in the downside capture ratio of the S&P Global Infrastructure Index versus the MSCI ACWI Index, which has generally been under 90% over the short and long term, indicating that infrastructure has declined only about 90% as much as the MSCI ACWI Index in the periods shown below.⁸

As illustrated in the chart below, infrastructure has delivered a higher Sharpe ratio (a measure of risk-adjusted return) versus equities over the past 20 years.⁹ The combination of relatively stable mid-single to high-single digit returns and downside protection, supported by the characteristics of listed infrastructure and stable cash flows, has resulted in positive risk-adjusted returns over the short, mid and long term.

Infrastructure downside capture ratio

Sharpe ratio

Multidimensional research support

Our approach to infrastructure investing is supported by our multidimensional research platform. Our research capabilities help us to more thoroughly evaluate investment opportunities and make better-informed decisions. Our specialists help us identify and investigate thematic tailwinds that could drive stock prices—such as decarbonisation, deglobalisation and aging populations. Our fixed-income analysts provide insights into the capital structure of our investments, while our investigative research team equips us with a better understanding of different regulatory environments and deeper research into our holdings and investable universe. Our specialist researchers speak with regulators, lobbyists, trade journalists, lawyers and market participants across the globe to explore the impacts of upcoming elections and evolving legislation, as well as potential risks and opportunities spanning telecommunication cables, wildfires, existing contracts, etc. Our multidimensional research team delivers an extra layer of insights, which we believe differentiates our approach to investing in publicly listed infrastructure.

Conclusion

Historically, publicly listed infrastructure investments have provided relatively stable absolute and risk-adjusted returns through market cycles. Infrastructure securities are issued by companies that provide services essential for societies and economies to function and thrive. These are generally companies that have hard-asset-owning business models in heavily regulated industries. Their revenues are often governed by long-standing contracts with built-in pricing increases linked to inflation, granting them the ability to pass inflationary pressures through to their clients. These mechanisms allow listed-infrastructure securities to deliver income while also protecting against inflation. In our view, there are considerable tailwinds supporting listed infrastructure securities and offering investors attractive opportunities in the space, especially those seeking yield and downside protection in turbulent markets.

[1] Boston Consulting Group. May 2023. https://web-assets.bcg.com/c8/97/bc0329a046f89c7faeef9ab6a877/bcg-global-asset-management-2023-may-2023.pdf

[2] Boston Consulting Group. May 2023. https://web-assets.bcg.com/c8/97/bc0329a046f89c7faeef9ab6a877/bcg-global-asset-management-2023-may-2023.pdf

[3] Morningstar as of 31 January 2024.        

[4] Bloomberg as of 31 December 2023.

[5] Bloomberg and Morningstar. As of 31 December 2023.

[6] Bloomberg and Morningstar. As of 31 December 2023.

[7] Morningstar as of 31 December 2023.

[8] Morningstar as of 31 January 2024.         

[9] Morningstar as of 31 January 2024.      

Key Points:

• Historically, publicly listed infrastructure investments have provided relatively stable absolute and risk-adjusted returns through market cycles.
• Listed-infrastructure securities are typically issued by companies with hard-asset-owning business models in heavily regulated industries, with contracts that allow them to pass inflationary pressures on to their end consumers.
• The stability of cash flows also provides downside support in difficult equity market environments.

Alternative investments are on the rise. These financial assets, which include hedge funds, private equity, real estate, infrastructure, commodities, private debt and liquid alternative mutual funds, accounted for 21% of global assets under management (AUM), or $20 trillion, in 2022. Currently, the growth trajectory for alternatives is second only to passively managed investments, with AUM expected to reach $29 trillion by 2027.¹ 

For investors seeking to allocate to alternative investments, we believe listed infrastructure could be a compelling option. Infrastructure assets are expected to grow at a compound annual growth rate (CAGR) of 11% from 2022 to 2027, ultimately making up 7% of a $29 trillion global alternatives market.² What are the key draws of listed infrastructure in the current environment? Listed infrastructure has historically delivered consistent mid-to-high single-digit total returns, above market yield. Furthermore, these assets may offer downside protection and a hedge against inflation, in addition to favorable long-term risk-adjusted returns relative to equities and other listed alternatives.

Current Market Environment

Inflation has begun to decelerate across developed economies, leading to a pivot in the expected path of interest rates. At the same time, governments are deploying trillions in global infrastructure funding to support energy-transition objectives and reshoring initiatives and to maintain aging infrastructure. Significant megaprojects, or large-scale projects that typically cost $1 billion or more, are expected to break ground in 2024 to reduce energy dependence and bring semiconductor supply chains closer to home.

Multiple infrastructure sectors, such as utilities and renewable energy, lagged in 2023 due to the rising interest-rate environment, as companies in these industries generally rely on debt markets to fund future growth. As the tide appears to be turning on the interest-rate front, sentiment for listed infrastructure is improving. Against this backdrop, our outlook for listed infrastructure is constructive, and we believe this alternative asset class could unlock opportunities for investors.

Stable Returns and Inflation Protection

As shown below, listed infrastructure has delivered consistent mid-to-high single-digit total returns over the past 20 years, outperforming equities over that time period.³ The characteristics of listed infrastructure, which allow companies within the asset class to deliver income while also protecting against inflation, drive these steady return streams.

Income returns play a substantial role in the overall performance of listed infrastructure. Listed-infrastructure securities are typically issued by companies with hard-asset-owning business models in heavily regulated industries, with contracts that allow them to pass inflationary pressures on to their end consumers. These are typically dividend-paying equities, and as such can generate stable cash flows that similarly keep pace with inflation. Currently, infrastructure equities deliver a dividend yield twice that of global equities, as depicted below.⁴

The US inflation rate year over year has increased 3% or more during seven of the last 20 calendar years. During these seven years, listed-infrastructure equities have appreciated an average of 12.4%, versus global equities which have appreciated 7.5%.⁵ Likewise, infrastructure assets have been favorable investments historically when rates drop. US rates have fallen in 10 of the last 20 years, and in those 10 years, infrastructure has returned an average of 8.6%, while global equities have returned 7.7%.⁶

Annualized Returns (Total Return Annualized Month End)

Dividend Yield

Downside Protection and Risk-Adjusted Returns:

The stability of cash flows can also provide downside support in difficult equity market environments. Over the past 20 calendar years, the MSCI ACWI Index—which comprises large-cap and mid-cap equities across both developed and emerging markets—has dropped five times. In these down-market environments, listed infrastructure has fallen an average of 12.1%, as compared to global equities which have declined an average of 15.9%.⁷ This is evident in the downside capture ratio of the S&P Global Infrastructure Index versus the MSCI ACWI Index, which has generally been under 90% over the short and long term, indicating that infrastructure has declined only about 90% as much as the MSCI ACWI Index in the periods shown below.⁸

As illustrated in the chart below, infrastructure has delivered a higher Sharpe ratio (a measure of risk-adjusted return) versus equities over the past 20 years.⁹ The combination of relatively stable mid-single to high-single digit returns and downside protection, supported by the characteristics of listed infrastructure and stable cash flows, has resulted in positive risk-adjusted returns over the short, mid and long term.

Infrastructure Downside Capture Ratio

Sharpe Ratio

Multidimensional Research Support

Our approach to infrastructure investing is supported by our multidimensional research platform. Our research capabilities help us to more thoroughly evaluate investment opportunities and make better-informed decisions. Our specialists help us identify and investigate thematic tailwinds that could drive stock prices—such as decarbonization, deglobalization and aging populations. Our fixed-income analysts provide insights into the capital structure of our investments, while our investigative research team equips us with a better understanding of different regulatory environments and deeper research into our holdings and investable universe. Our specialist researchers speak with regulators, lobbyists, trade journalists, lawyers and market participants across the globe to explore the impacts of upcoming elections and evolving legislation, as well as potential risks and opportunities spanning telecommunication cables, wildfires, existing contracts, etc. Our multidimensional research team delivers an extra layer of insights, which we believe differentiates our approach to investing in publicly listed infrastructure.

Conclusion

Historically, publicly listed infrastructure investments have provided relatively stable absolute and risk-adjusted returns through market cycles. Infrastructure securities are issued by companies that provide services essential for societies and economies to function and thrive. These are generally companies that have hard-asset-owning business models in heavily regulated industries. Their revenues are often governed by long-standing contracts with built-in pricing increases linked to inflation, granting them the ability to pass inflationary pressures through to their clients. These mechanisms allow listed-infrastructure securities to deliver income while also protecting against inflation. In our view, there are considerable tailwinds supporting listed infrastructure securities and offering investors attractive opportunities in the space, especially those seeking yield and downside protection in turbulent markets.

[1] Boston Consulting Group. May 2023. https://web-assets.bcg.com/c8/97/bc0329a046f89c7faeef9ab6a877/bcg-global-asset-management-2023-may-2023.pdf

[2] Boston Consulting Group. May 2023. https://web-assets.bcg.com/c8/97/bc0329a046f89c7faeef9ab6a877/bcg-global-asset-management-2023-may-2023.pdf

[3] Morningstar as of January 31, 2024.         

[4] Bloomberg as of December 31, 2023.

[5] Bloomberg and Morningstar. As of December 31, 2023.

[6] Bloomberg and Morningstar. As of December 31, 2023.

[7] Morningstar as of December 31, 2023.

[8] Morningstar as of January 31, 2024.        

[9] Morningstar as of January 31, 2024.