According to Goldman Sachs’ Brian Bolster and Michael Sachs, the definition of infrastructure is evolving.
Historically, the infrastructure asset class has been associated with bridges, toll roads, ports and other “hard” assets that produce consistent, low-risk dividends to investors because of the essential nature of the asset.
As demand has outstripped the supply of attractive projects to invest in, investors started to look at other asset classes that retain some of the core elements of public infrastructure. They have recently moved into other infrastructure-like investments, including data centers, energy infrastructure, pipelines and renewable projects.
Core infrastructure assets, such as airports, bridges, tunnels and roads, are hard assets which provide long-term, stable cash flows and have a low correlation to other asset classes. Like traditional infrastructure, new infrastructure-like assets are capital intensive and have high barriers to entry, making it hard for other companies to compete.
In 2018, investors raised a record $104 billion in total equity. Mega funds managing larger than $5 billion in assets are also increasingly dominating the landscape. The trend toward ultra-large funds changes the scale of the potential investable universe and also creates a new dynamic in the competition for assets. In 2019, investors raised the largest-ever fund at $22 billion.
Looking across a lot of different industries to examine all the possibilities for infrastructure-like investments, investors are weighing different risk profiles. Core-plus encompass the broader definition of infrastructure-like assets which typically offer higher returns but with higher risks. At the other end of the spectrum is the super-core category, which is considered the most conservative category of infrastructure (typically utilities and water assets) which generate levered returns in the mid- to high-single digits. Funds are generally looking to target assets which fit into one of these categories.
As noted by Michael Sachs, one of the biggest challenges facing investors is that the supply of attractive projects hasn’t kept pace with demand. Core investment opportunities across Europe and Australia have largely been identified, while projects in North America have remained mired in red tape. Goldman Sachs expects to see more M&A opportunities, given the expanding definition of infrastructure and the larger amount of capital infrastructure funds are looking to deploy.
Image: Houston, Texas, USA / Random Sky
