Before the financial crisis, the traditional 60 per cent equity/40 per cent fixed income asset allocation mix still formed the basis of many portfolios, with the more adventurous investor perhaps looking to emerging market debt or high yield to add a little spice to things.
However, this approach has since evolved and investors are now able to access alternatives, such as renewable infrastructure, residential social housing, litigation finance or healthcare royalties.
While the move towards a broader investment universe originally began with large institutional investors, retail investors have increasingly embraced greater choice and the potential benefits it can bring to a portfolio.
Unsurprisingly, the willingness to consider alternative assets has been given added impetus by the current era of ultra-low interest rates; the search for yield has been an integral driver of asset prices over recent years and has opened minds to more diverse sources of return.
One notable beneficiary of this trend has been infrastructure. Historically, responsibility for the construction and maintenance of a country’s infrastructure, whether that is energy supply, roads or railways, has rested with the public sector.
Only relatively recently has infrastructure evolved into an investable asset class for private investors.
However, since then, its popularity has grown almost exponentially. Last year, global fundraising for privately owned or ‘unlisted’ projects reached a new record level of circa $85bn (£75.2bn).
The boom in investor interest should not come as a shock given unlisted infrastructure can boast several attractive characteristics.
Most notably, investors can benefit from the low correlation to traditional asset classes, as well as potentially attractive risk-adjusted returns. On top of this, cash flows tend not only to be stable and predictable, but most have an embedded element of inflation protection.
Supply and demand
Of course, the asset class is not immune to the law of supply and demand. Given the large inflows of capital from pension funds, sovereign wealth funds and private investors, competition for assets has increased markedly and potential returns have been squeezed in some instances.
The impact of this has been most keenly felt in some of the larger-scale projects, or so-called ‘trophy’ assets. London City Airport, which traded a couple of years ago at a reported 40 times its pre-tax earnings, is a good example.
It is because of this that greater value often exists in mid-size and smaller deals, typically those with enterprise values (a measure of a company’s total value) of less than £200m.
A larger pool of potential deals and the absence of the intense competition that marks the ‘trophy’ end of the market mean investors can exercise greater price discipline while still being able to put their cash to work.
These opportunities extend across continental Europe, from ground-based solar panel farms in Poland to rolling-stock partnerships in the UK, Nordics, Germany and Italy.
While acknowledging that infrastructure is a diverse universe containing myriad assets with diverse risk/return profiles, the asset class appears particularly attractive at this late stage of the business cycle when a fair amount of uncertainty exists around recession risk.