Unlisted Infrastructure: Essential Assets?
For some more insights on the infrastructure asset class, we spoke with Alina Osorio, CFA, president and CEO of Fiera Infrastructure. Based in Toronto, Fiera Infrastructure focuses on Canadian and international infrastructure assets. Below is a lightly edited transcript of our discussion.
CFA Institute: Why do investors allocate to infrastructure as a separate asset class in their portfolios?
Alina Osorio, CFA: In most developed economies around the world, infrastructure has experienced significant underinvestment. Traditionally, it’s been the responsibility of governments given that more up-to-date infrastructure has been correlated to increased productivity in an economy.
However, fiscal challenges by governments mean that private capital is now becoming more and more involved. As investors seek opportunities to put capital to work, investing in infrastructure is becoming increasingly attractive. Why is it attractive? Infrastructure has historically been associated with stable and reliable cash flows and returns. Since the investment is tied to essential assets, it’s less vulnerable to economic cycles and has historically exhibited low correlation with other asset classes, such as real estate or public equities.
In the portfolio context, these attributes have made it a valuable diversifier with relatively stable and predictable returns. A significant portion of the return in infrastructure has come from cash-flow distributions. We live in a world hungry for yield and we believe infrastructure is a great asset class to provide that.
Do these factors differ between listed and unlisted infrastructure?
One of the requirements in infrastructure from a capital perspective is long‑term investor patience. New or “greenfield” infrastructure takes years and sometimes a decade from the planning phase to the final execution of a project. It is often difficult to put pure infrastructure into a listed company that lives and dies by quarterly results.
The other issue is that the need to fund capital expenditures — to expand or maintain the assets — can be challenging for listed companies. The management, maintenance, and reinvestment of capital is very important in this asset class.
The third point is that listed infrastructure stocks tend not to be pure plays, so you often get exposure to companies that have different business lines.
However, there are listed companies that operate in the infrastructure sector and thrive within it. A good example are the utilities — water, electric, and gas. They exist and some thrive.
What are unlisted infrastructure’s pros and cons?
Investors do not place 100% of their portfolio in our product, so it’s a matter of diversification, of course. They typically do significant research to understand the asset class and appreciate the need for long-term investment horizons.
Liquidity is something that investors have to be aware of as well. As with private equity or real estate, you cannot exit these investments in a short period of time. We use an open-ended fund structure to give investors some medium-term liquidity. We’re very proud of the structure we’ve selected as it brings together long-term investing at the project level, while also providing a moderate level of liquidity to our investors.
Social responsibility is an important trend in investment management. How does that manifest itself in unlisted infrastructure?
Infrastructure assets are highly regulated with oversight from environmental agencies and other regulatory and government authorities. The compliance standards that we are obligated to meet are as onerous and strict as the listed companies. We don’t get off the hook because we’re unlisted. That’s one very important point.
On top of that, our investors and prospective investors are asking us for ESG [environmental, social, and governance] responsible actions. We are a signatory of United Nations Principles for Responsible Investment (UNPRI). What that means is that we’ve brought in to ESG both on the investment side as well as the asset management side. It’s now an intrinsic part of what we do and crucial to the investment process.
When we look at deals, we have to think about ESG and report on each of the three components. In turn, we ensure that our contractors and project managers are operating our various assets in an ESG‑compliant manner.
You spoke of the long lead time from the conceptual to the operational stage. In the future, as infrastructure assets mature, do you foresee more being listed?
We have considered IPOs as a way of monetizing some of our investments. We are, as I mentioned, long‑term investors, but that doesn’t mean we will never sell any assets. We will, for the right valuation, consider an IPO as an exit strategy.
While a listing is always a possibility, the supply of unlisted capital is strong right now. However, things can change as market dynamics evolve.
Do smaller investors have access to the infrastructure space?
There is a widely held assumption that the unlisted side is only available to very large, sophisticated investors. Historically that may have been the case, but things are changing.
One of the things that we’re doing at Fiera Infrastructure, which I’m very proud of, is that we are providing access to our investments for a wider range of investors: medium‑sized institutional investors, high-net-worth investors, and even retail investors. It speaks to the creativity of our organization at the Fiera Capital level, and again, I’m not saying that we’re finished here. It’s an ongoing evolution.
Liquidity is the biggest challenge. Infrastructure assets are long-term and investors want to get paid for that. It’s hard to strike the proper balance — investors wish to receive premium returns while demanding increased liquidity.
Speaking of enhancing returns, what’s the appeal of mid-market infrastructure?
It is a strong belief of ours and backed up by numbers and experience that the mid‑market space — single deals with than less than $200 million of equity and up to $1 billion in total enterprise value — offers more opportunities for investors.
Volumetrically, when you think of the numbers involved here, there are many, many, many opportunities to invest in projects that are within that threshold size. There are other mid‑market players like us, clearly, but we’ve seen that much of the capital going into this sector is directed at the very large end of the market. We think that mid-market infrastructure deals offer less competition by definition because there are more opportunities to deploy capital.
The mid-market offers a greater variety of underlying assets, such as renewable projects, utilities, transmission towers, or telecom-related infrastructure. Quite a few of these are early‑stage opportunities that may allow us to grow with them and have organic expansion opportunities.
Smaller-size deals also allow us to do more partnerships with various sponsors, developers, and management teams. These types of deals happen much more often at the mid‑market level than at the larger end. We think it’s a very attractive part of the market to be in.
Sure, it needs more work. It requires more due diligence, more resources. A $20‑million deal is almost as much work, or the same level of work, as a $150‑million deal. Not everybody is prepared to do that. Not everybody has the resources and the team to do that and also pursue opportunities globally. The ability to evaluate global opportunities is important because at the end of the day, you’re buying cash flows and those cash flows are always affected by the regulatory environment and the operating environment that infrastructure assets live in.
Peering over the horizon, what anticipate any emerging trends in the infrastructure space?
We’re on the cusp of a change in mindset and we hope to lead its progression. We don’t think these assets should sit in private equity models that typically sell within seven years in the hope of a large capital gain. Instead, the focus should be on the management of the underlying assets to ensure that they are well-maintained and keep those steady cash flows investors rely on.
The investment community is starting to view these essential, hard assets differently. They see them as assets that society needs. You buy them for the long term and enjoy the returns through distributions and capital appreciation, but a big part of it is distributions and cash flows.
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