Conference Presentation, Panel
Infrastructure as an Asset Class
Milken InstituteStacey Worden, Andrew McAfee, Brian Chase, Katao Kiuna, Glenn Ireland, Chinelo Anohu-Amuzu
- Bridging the infrastructure gap in OECD economies could generate 3.5% additional growth, whereas the current lack of infrastructure in Africa and developing nations results in a 5% growth shortfall.
- McKinsey expects to finalize recommendations for the G-20 to establish infrastructure as a legitimate asset class following B20 discussions, a shift from the perspective held 15 years ago.
- The number of institutions seriously investing in infrastructure has grown from 15 fifteen years ago to 250 globally last year, though a persistent gap remains between current allocations and desired levels.
- Infrastructure is predicted to behave differently than bonds or private equity by providing essential services, holding high fixed assets, delivering long-term stable returns, and offering inflation indexation.
- While investors desire more infrastructure, they will avoid pursuing uneconomic projects, with some questioning the return on equity for core infrastructure in OECD countries.
- The $3.7 trillion U.S. municipal bond market has reached its expansion limit, creating new opportunities in sectors like water and power, while the market outside the U.S., such as in Canada, Australia, and Europe, understands infrastructure as an asset class better.
- Investor perception is shifting regarding risk, recognizing that construction is not always riskier than existing assets and that OECD countries are not always less risky than emerging markets.
- In Africa, mining and telco industries historically led infrastructure development, with the expectation that future profits will shift to power and transport sectors as telecom profitability matures.
- The African power sector is at an inflection point with a steep growth trajectory, exemplified by the ability to connect 500,000 households in Kenya in one year, a milestone that previously took 50 years.
- Capturing inefficiencies between supply and demand in African economies is expected to yield very high returns, with palm transportation and power identified as the most ripe areas for private investment.
- Declining commodity prices will force mining companies to face inefficiencies and shift away from owning strategic infrastructure like desal plants or roads, moving instead to partner with dedicated infrastructure companies.
- Shareholder pressure is driving mining companies away from owning assets, while institutional investors are urged to engage proactively at earlier stages to transform half-baked projects into investable transactions.
- Political risk remains a primary concern for investors, specifically regarding government U-turns or nationalization, which can be mitigated by co-investing with local long-term institutional investors like pension funds.
- In Nigeria, foreign investors actively seek local partners for protection and proper interpretation of the local environment, while U.S. political risk is characterized by a network of vested interests including engineering consultants and lawyers.
- The most significant challenge in infrastructure development is securing debt financing despite high equity returns of 18% to 30% IRR, with an average closing time of seven years on the debt side causing losses on brownfield assets.
- A fundamental rethink of funding models is required as relying on short-term local bank deposits for long-term infrastructure is ineffective, whereas partnering with the IFC or sovereign wealth funds can offset political risk.
- Large investors admit to historically poor performance in addressing greenfield infrastructure challenges, and investors in African greenfield projects cannot contract away risks, necessitating ownership of engineering, procurement, and construction (EPC) activities.
- Capacity transfer from development finance institutions like the IFC is expected to allow local entities to domesticate expertise and accelerate project delivery beyond the current seven-year average.
- Misperceptions of political risk create asset mispricing, offering opportunities in industrial infrastructure with credit-worthy customers, while the disruptive technology of the mobile phone has yet to impact the power sector to the same degree.
- The introduction of independent third-party capital to shared infrastructure projects is predicted to facilitate shared use concepts by avoiding direct competition between mining companies.
- The most sophisticated investors are focusing on export-focused agricultural logistics in emerging markets due to urbanization and protein consumption trends, while social infrastructure assets generally rely on government-backed availability payments.
- Investment portfolios are moving up the risk-reward continuum by targeting "infrastructure plus," new geographies, and earlier-stage "khaki infrastructure," with power, transportation, and two other sectors identified as the best ideas in Africa for the next few years.