A growing understanding of the differences between private and listed infrastructure may lead to a growth in listed allocations. The scarcity of quality assets in the private market, coupled with the growing amount of capital looking to invest – ‘dry powder’ and heady private asset valuations – will strengthen the case for listed infrastructure.
Over past years, most investors’ interest and ultimately allocations in the infrastructure asset class were focused on the private or unlisted side. However, there is growing interest among investors as to the alternative, or complementary, benefits of listed infrastructure. This is evidenced by the growth in assets under management (AUM) of dedicated listed infrastructure managers over recent years. Since 2016 AUM more than doubled to $145bn by the end of 2021.
The underlying enterprise value of our ‘Global Infrastructure Index’ constituents currently stands at approximately $4 trillion, and is roughly five times larger than the respective total enterprise value of the comparable benchmark for the unlisted side: Preqin Private Infrastructure.
Despite the obvious difference in investment wrapper – listed and non-listed – the underlying assets offer a long list of common features. The asset class ‘infrastructure’ is typically long-lived assets with contractual-based cash flows linked to inflation that aim to provide both income and capital appreciation over time. The assets require the same management experience to operate and manage them, and they have local market demand drivers and are subject to the same regulations. The investment, or return, performance is driven by underlying infrastructure projects and their respective cash flows and earnings. Finally, as essential components of the global economy, infrastructure exhibits large exposures to both the energy, utilities and transportation sectors.
With a focus on investing in listed infrastructure, the asset class enhances overall portfolio construction for investors in three key areas: (i) asset diversification; (ii) attractive valuations versus unlisted and tradability; or (iii) liquidity which cannot be offered by private asset stakes or unlisted investments.
Valuation differences
Historically, investors have consistently valued private infrastructure at higher enterprise value and earnings before interest, taxes, depreciation and amortisation (EBITDA) multiples compared to listed infrastructure. Historical averages are in the 30 to 40 percent premium range over listed multiples. This is mainly driven by the belief that private investments provide lower volatility and correlations compared to other asset classes. However, these perceived advantages may be overstated due to the smoothing effects of appraisal-based valuation methodologies used to value private infrastructure markets.
Appraisal-based index returns present a smoothed and lagged picture of what was happening at each point in time in the underlying private infrastructure market. This is caused by two phenomena: (i) the appraisal process at the level of individual infrastructure project valuation is essentially ‘backward looking’, as it relies only on past financials of projects; and (ii) the index construction process requires temporal aggregation of appraised values, as the index is constructed each period by averaging across the most recent appraised values of all the individual infrastructure projects (even those that were not reappraised during the current quarter).
This data problem causes the returns of appraisal-based indices to appear to have less volatility than is really the case, and to have less correlation with other return series that are not similarly smoothed and lagged. This distorts any direct comparison of the risk-adjusted investment performance of private and listed infrastructure (or of private infrastructure and liquid securities such as stocks and bonds) and biases the results of any mixed-asset portfolio optimisation analysis based on the index returns data.
In our research, we both unlagged and de-smoothed the private infrastructure series to provide a like for like comparison. In fact, in simple terms, the historical returns of listed and unlisted infrastructure have been remarkably similar over the past 15 years, each achieving annualised returns of approximately 11 percent. One could argue that listed infrastructure can be a bellwether for what is to come in the private space, due to the inherent lag caused by using an appraisal-based index.
Liquidity
The amount of dry powder (capital committed by investors that has not been invested) has climbed to record levels over the past decade in private infrastructure.
Much of this rise is a result of private infrastructure managers taking a cautious approach to deploying capital in the face of high valuations and limited or scarce private infrastructure opportunities. Additionally, levels of dry powder may continue to climb in the short term, if these market conditions persist and investors continue to allocate capital into this space to benefit from the COVID-19 recovery.
Private asset markets tend to exhibit a relative lack of liquidity and informational efficiency in asset pricing. With this dynamic in mind, another possible explanation for the comparable return performance between private and listed infrastructure is the greater liquidity and informational efficiency of the public capital markets; it exerts greater performance pressure on managers of public infrastructure companies, which weeds out poor performers.
However, on a long-term horizon, it is probably more logical to expect a higher return for equivalent assets that are held privately due to their lack of liquidity and a greater management burden for investors. Over the subject period mentioned earlier, this was not the case, as listed infrastructure performed in line with private infrastructure.
The more commonly discussed upside of liquidity in listed infrastructure is its ability to allow investors greater ease in portfolio rebalancing. Adding and trimming various infrastructure exposures on the fly is difficult and expensive, given higher valuation multiples, when dealing in private markets.
Attempting to time the market is also relatively more challenging on the private side, as the process for private infrastructure firms of raising and deploying capital can take considerable time. In fact, as of September 2021, there was over $300bn in dry powder held within private infrastructure funds. In listed infrastructure, by contrast, capital can be deployed instantly to provide exposure to companies already generating cash flows.
Mixing or ‘blending’ infrastructure
Blending private and public infrastructure may lead to more optimal risk and return characteristics for a portfolio. If an existing portfolio only contains private infrastructure, investors may benefit from adding listed to gain the return-enhancing characteristics of the variance of returns, diversification, in addition to the increased liquidity listed provides. On the other hand, a portfolio containing only listed infrastructure may benefit from adding private. Here, adding private infrastructure exposure to an existing listed portfolio may potentially soften volatility and allow access to differentiated infrastructure projects that may enhance returns.
In the end, asset owners will likely benefit from a blend of both private and listed infrastructure to achieve their desired optimal risk and return characteristics for their portfolio.
In conclusion, while private infrastructure is noted for its diversification benefits, predictable cash flows and low volatility, listed infrastructure can enhance diversification while still providing comparable contractual-based cash flows and annualised returns.
Volatility of listed infrastructure will always be relatively higher, in part due to the valuation differences of the private market. But over the long term, investors have not sacrificed performance when choosing to invest in listed infrastructure over private – returns come out at approximately 11 percent annualised.
A growing understanding of the differences between private and listed infrastructure may lead to a growth in listed infrastructure allocations in the future. The scarcity of quality assets in the private market, coupled with the growing amount of dry powder looking for a home and heady private asset valuations, will strengthen the case for many investors to seriously consider listed infrastructure.
Fraser Hughes is founder and chief executive of GLIO. He can be contacted on +32 (0)2 767 1888 or by email: f.hughes@glio.org.
© Financier Worldwide
FAQs
What is an example of listed infrastructure? ›
Examples of these essential assets include toll roads, airports, sea ports, utility power grids, cell phone towers, waste facilities, energy pipelines or water utility systems.
What is unlisted infrastructure? ›Unlisted assets are investments that are not listed on an exchange. They can include infrastructure (roads, power grids and airports), property (large office buildings and shopping centres), private equity (investments in private companies) and private credit.
What is the difference between listed infrastructure and private infrastructure? ›Listed infrastructure is very liquid, and can be traded daily. Conversely, private infrastructure is very illiquid, generally requiring years of commitment. Liquidity enables the investor to rebalance a portfolio in ways that are not possible with illiquid, unlisted investments.
Why invest in listed infrastructure? ›Listed infrastructure securities offer greater liquidity levels while unlisted investments have the potential for lower volatility and lower correlation with other major asset classes. Unlisted infrastructure is valued less frequently than listed infrastructure and offers greater risk-adjusted return potential.
What are the 4 types of infrastructure? ›Infrastructure such as roads, bridges, waste management and telecommunications equipment are just a few types of infrastructure that people use daily.
What are 3 examples of public infrastructure? ›Examples of Public Infrastructure
Transportation infrastructure – Bridges, roads, airports, rail transport, etc. Political infrastructure – Governmental institutions such as courts of law, regulatory bodies, etc.; Public security services such as the police force, defense, etc.
Listed investments are regularly and continuously traded (when the “market” is open). This availability to trade and the volumes traded is called liquidity. On the other hand, unlisted investments are not traded regularly or in a restricted way and therefore generally have lower liquidity.
What is the difference between listed and unlisted property funds? ›Listed funds are listed or quoted on the ASX (or other exchange) and issue investors with securities (which are just like shares) that can be traded at any time through a stock broker. Unlisted funds (including unlisted property funds or property syndicates) issue you with units (as they are a managed fund).
What is the difference between listed and unlisted property? ›Typically, trusts are either listed, in which they're traded on a stock market (such as the Australian Securities Exchange), or unlisted, in which they're privately held and there is no public market. Investors in listed trusts can buy or sell at any time – the same as they would trade shares on the stock market.
What is the benefit of introducing unlisted infrastructure in a portfolio? ›AN ABILITY TO TILT ACROSS REGIONS AND SECTORS
This ability can enhance the risk-return profiles of portfolios. Unlisted infrastructure funds are generally unable to make medium-term tilts across regions and sectors during the life of the fund to take advantage of pricing opportunities.
What is listed infrastructure equity? ›
Listed Infrastructure equities are shares in publicly listed companies that provide services to society and the economy. This could be electricity companies, gas and water distribution, broadcasting companies and transportation companies.
Who owns infrastructure investment fund? ›JP Morgan Infrastructure Investments Fund is an infrastructure opportunistic fund managed by JP Morgan Asset Management. The fund is located in New York, New York. The fund targets exploration, production & refining, utility and infrastructure sectors.
What are the benefits of unlisted funds? ›Unlisted managed funds offer investors access to alternative assets such as infrastructure, private equity, and property. These assets are typically not available to individual investors and provide opportunities for higher returns than traditional assets like stocks and bonds.
What is the benefits of investing in unlisted companies? ›The unlisted shares price provides different risk dynamics, complementary to someone who has invested in IPO shares and can offer similar to better return potential compared to listed shares. Moreover, there are chances that these shares will go public in future which can lead to a substantial gain.
What are the risks of investing in infrastructure funds? ›Risks of Investing in Infrastructure
Although leverage is a common characteristic of infrastructure, it still poses a risk. High amounts of leverage result in high amounts of interest to be paid. If the revenue-generating abilities are enough to match the interest, then that would be a huge risk for the asset.
PM Modi says, the country is focussing on four pillars of infrastructure, investment, innovation & inclusion to build developed India. Prime Minister Narendra Modi has said that to build a developed India, the country is focussing on four pillars - infrastructure, investment, innovation and inclusion.
What are 2 examples of infrastructure? ›Examples include roads, highways, and bridges, as well as the assets required to make them operational such as transit buses, vehicles, and oil refineries.
What are the 7 infrastructure? ›Seven Domains of IT Infrastructure Seven domains can be found in a typical IT infrastructure. They are as follows: User Domain, Workstation Domain, LAN Domain, LAN-to-WAN Domain, Remote Access Domain, WAN Domain, and System/Application Domain.
What are six major aspects of infrastructure? ›These elements include business policies, business processes, people and organization, management reports, methodologies, and systems and data.
What are the three critical infrastructures? ›- Bridges and Tunnels.
- Energy.
- Drinking Water.
- Disaster Response.
What are 5 public infrastructures? ›
It involves electricity, water, roads, and telecom. Examples of public infrastructure are political infrastructure, transportation infrastructure, power, and energy infrastructure, telecommunication infrastructure, educational infrastructure, health infrastructure, water infrastructure, and recreational infrastructure.
What is an example of a listed and unlisted company? ›If a public company is not listed on any stock exchange, it is an unlisted public company. For example, Tata Technologies. Similarly, unlisted private companies are private companies without any listed security, such as Swiggy, RazorPay, Oyo, etc.
What is the difference between listed and unlisted closed end funds? ›Shares of traditional closed-end funds trade on an exchange and, therefore, investors can buy and sell shares of traditional CEFs just like a stock. Unlisted CEFs typically offer a fixed number of shares over longer periods of time, typically several years. The shares of unlisted CEFs are not publicly traded.
How do listed funds work? ›A listed fund is a managed fund traded on a stock exchange. They function like managed funds, but traded like shares which can be bought and sold during trading day on the stock exchange. Listed funds are actively managed by fund managers to generate alpha and outperform relevant benchmarks.
How do unlisted property funds work? ›An unlisted property fund is a form of direct property investment that provides investors the opportunity to gain access to commercial property assets through an investment in a fund.
Are unlisted property funds a good investment? ›In the MSCI report released in February 2018, unlisted property funds averaged total returns of 23.4% for the 2017 calendar year, distinctly higher than the 7.7% return delivered by Australian shares for that period. In fact, unlisted commercial property has experienced strong returns across the entire decade.
What is the difference between listed and non listed? ›A listed company is a stock exchange-listed company wherein the shares are openly tradable. An unlisted company is a company that is not listed on the stock market. Listed companies are acquired by several shareholders. Unlisted companies are acquired by private investors like founders, founders' family and peers.
What qualifies as listed property? ›Listed property is any asset that a company uses for business purposes for more than 50% of the time. These assets also depreciate in value over time and can be used for personal purposes when not in use for the day-to-day operations of the business.
What has been removed from listed property? ›Under the Tax Cuts and Jobs Act, computers and peripheral equipment placed in service after 2017 are removed from the definition of listed property, meaning they no longer require the increased substantiation requirements for listed property.
What is the difference between direct and listed property? ›Simply put, direct property investment is when the investor is the actual owner of a brick-and-mortar structure. The investor has full control over most controllable aspects of property ownership and is directly exposed to its risks. Listed property, on the other hand, is a type of indirect property investment.
What are the risks of investing in unlisted companies? ›
Liquidity risk is one of the biggest risks for any investment. This basically means you may not be able to sell your investment whenever you need the money without significant loss of capital. For example, suppose you hold 100 shares of Lava International, a company that makes electronic devices, for a while now.
What are the two reasons government invests in infrastructure projects? ›These infrastructure investments will create good-paying jobs – including union jobs and jobs that do not require a college degree. The projects will grow the economy, strengthen supply chains, improve mobility for residents, and make our transportation systems safer for all users.
What fund has the highest return? ›| Ticker | Name | 5-year return |
|---|---|---|
| PRBLX | Parnassus Core Equity Investor | 12.09% |
| SRFMX | Sarofim Equity | 11.71% |
| FGRTX | Fidelity® Mega Cap Stock | 11.63% |
| PRCOX | T. Rowe Price U.S. Equity Research | 11.42% |
For any growing economy, investments in infrastructure are the key to future growth. It is estimated that high quality infrastructure in the form of quality roads, highways, inland waterways, ports and airports will boost the GDP growth by 1.5-2.0% annually.
How do you value infrastructure funds? ›Therefore, infrastructure fund managers use anything from inflation plus margin to a blend of equity and bond indices to measure performance. For infrastructure assets, practitioners typically use a multiples based approach or an income approach such as Discounted Cash Flows (“DCF”) to calculate value.
Why are listed infrastructure assets suited as an inflation hedge? ›Private infrastructure assets are often presented as an inflation hedge because their revenues tend to be linked, in different ways, to increases in inflation.
What is the largest infrastructure fund of funds? ›| Pension fund | Total assets ($'000) | |
|---|---|---|
| 1 | CPP Investments | 411,579,980 |
| 2 | CDPQ | 304,413,872 |
| 3 | Allianz | 1,290,256,560 |
| 4 | ADIA | 829,000,000 |
- Nucor (NUE) Nucor is the largest domestic steelmaker in North America. ...
- United Rentals (URI) ...
- Vulcan Materials (VMC) ...
- Martin Marietta Materials (MLM) ...
- Caterpillar (CAT) ...
- American Tower (AMT) ...
- Deere & Co (D.E.) ...
- Brookfield Infrastructure Partners L.P. (BIP)
The stable cash flow profile and asset-backed nature of infrastructure provides a degree of comfort to lenders. As a result, infrastructure financing typically involves high levels of debt (on average c. 75%2 of enterprise value) with the remainder in equity. A typical financing structure is set out in Figure 1.
Are unlisted shares safe? ›Unlisted shares offer different risk dynamics and can be complementary to someone who is invested in listed shares. They can be a good means to diversify the portfolio. Unlisted shares offer similar to better return potential as compared to that of listed shares.
Why is it riskier to buy unlisted securities? ›
Risks Investors Should Know
Because size and other requirements for companies are reduced or eliminated, some unlisted companies may be undercapitalized, have highly risky business plans, and be no more than an idea without a plan for success.
- Higher interest: The interest you pay will likely be higher than you would pay to a bank.
- Need seller approval: Even if a seller is game for owner financing, they might not want to be your lender.
#1 Serum Institute of India (SII) – Most Valuable Unlisted Company in India.
Can I invest in unlisted companies? ›Can you invest in unlisted companies? Yes, it is possible. There are thousands of companies which are unlisted but can offer significant returns. So, if you want to invest in companies like CSK, LAVA, BOAT, or OYO, you can.
Can I sell my unlisted shares? ›The Process to Sell Unlisted Shares
You need to transfer the unlisted share which you want to sell with the quantities to our that DMAT account. The same day when we'll receive the Unlisted Shares in our DMAT Account, your payment will be sent via IMPS or NEFT, whatever you prefer.
Capital risk — Investment markets are subject to economic, regulatory, market sentiment, and political risks. All investors should consider the risks that may impact their capital, before investing.
Which is the best infrastructure fund? ›- IDFC Infrastructure Fund.
- Franklin Build India Fund.
- Nippon India Power and Infra Fund.
- Kotak Infrastructure & Economic Reform Fund.
- DSP BlackRock India T.I.G.E.R Fund.
- Aditya Birla Sun Life Infrastructure Fund.
- HDFC Infrastructure Fund.
Equity Mutual Funds are prone to many risks but the most significant one is market risk. Equity Mutual Funds as a category are considered 'High Risk' investment products.
What is a listed infrastructure fund? ›The Russell Investments Global Listed Infrastructure Fund aims to achieve long term capital growth by investing worldwide in the shares of companies that are engaged in infrastructure projects. ALTERNATIVE. Long-term stability and inflation-protected growth.
What is global listed infrastructure? ›Source: GLIO, GPR, MSCI & Barclays
The Global Listed Infrastructure Organisation (GLIO) is the representative body for the $3 trillion market capitalization listed infrastructure asset class. GLIO raises investor awareness for the asset class through research, education, events and promotion.
What is infrastructure funding gap? ›
The global infrastructure financing gap is estimated to be around $15 trillion by 2040. To provide basic infrastructure for all people over the course of the next two decades, every year the world would need to spend just under $1 trillion more than the previous year in the infrastructure sector.
What are the three levels of infrastructure? ›IT infrastructure exists at three different levels: public, enterprise, and business unit. Each level of infrastructure provides a set of IT services and capabilities.
What is the return of international listed infrastructure? ›The infrastructure sector has provided investors with strong returns over the past decade. For the 10 years to 31 December 2022, the listed infrastructure sector delivered 9.5% p.a. while unlisted infrastructure delivered 11.4% p.a. Source: Bloomberg, EDHEC Infra, as at 31 December 2022.
What is the size of the global listed infrastructure market? ›Infrastructure Market Overview
The global infrastructure construction market size was $4.6 trillion in 2021 and is expected to grow at an AAGR of more than 2% between 2022-2026.
Global Infrastructure Partners has raised up to $15 billion to date for its flagship Global Infrastructure Partners V fund, sources familiar with the fundraising have told Infrastructure Investor.
What is the difference between private equity and infrastructure funds? ›The difference is that infrastructure PE firms invest in assets that provide essential utilities or services. Real estate private equity is similar because both firm types invest in assets rather than companies.