Trend 9: Alternative asset classes start to re-converge

Trend 9: Alternative asset classes

In search for higher-return investable opportunities - more aggressive investors would be moving to higher-risk markets.

Bridge view from below in night light

Over the past two years, we have highlighted ongoing changes in infrastructure investments. Two years ago, we suggested that – in search of higher-returns – more aggressive investors would be moving to less developed markets, taking greenfield risk and broadening the definition of infrastructure. Last year, we noted that the search for higher-yields and expansion into new markets would lead to a higher level of sophistication within investment firms. 

This year, we expect the lines between various asset classes to continue to blur an expansion in the pools of equity that will target the infrastructure sector. For example, the line between real estate investors and infrastructure investors is not just blurring – it is starting to disappear entirely. Real estate is, after all, one of the key components of any infrastructure project, but more recently we have seen traditional real estate private equity firms developing significant infrastructure funds and capabilities.

Interestingly, these sectors used to be much closer. Thirty years ago, most of the private investors who participated in infrastructure did so to capture the underlying real estate value. But over the past three decades, investors became much more specialized. Now, however, the pendulum is swinging once again.

In the developed markets, this trend is being driven by the search for new investable long-term opportunities. But in the developing markets, the ultimate goal seems to be to capitalize on rising levels of industrialization. The rationale is fairly obvious: better infrastructure leads to higher rates of industrialization which, in turn, creates economic growth and prosperity. By investing in infrastructure today, these investors are banking on greater profits tomorrow. 

Pros and cons of re-coverage

On the one hand, the move of private equity into infrastructure (particularly in the developing world) will do much to help close the massive funding gap that exists in many markets. It will also enable infrastructure investors to become even more sophisticated about assessing where the value of their investments lies.

The introduction of private equity-style approaches to infrastructure investment may also bring unwanted risks in the markets. On one hand, there will be a greater focus on actively managing assets, including embracing new technologies, in order to optimize performance rather than simply viewing infrastructure as a more passive ‘yield’ play. On the other hand, assets may be over-leveraged, and investment plans may unexpectedly shift. Ownership may also repeatedly change which would only lead to greater uncertainty in the affected markets.

Over the coming year, we expect to see private equity move into a wider range of assets across a wider variety of markets – largely focused on those that offer the greatest potential for rapid industrialization. We also expect to see the competition between these new players and the traditional infrastructure and real estate investors heighten as more parties start to fight for fewer investable opportunities.

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