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Alternative Market Briefing

87% infrastructure investors say 2019 met or exceeded their expectations

Wednesday, March 11, 2020

Laxman Pai, Opalesque Asia:

Infrastructure investors are pleased with recent performance, but concerns over asset pricing are pushing them further up the risk spectrum, said a report.

According to Preqin, the vast majority of surveyed investors are happy with the performance of their infrastructure investments.

Almost nine out of 10 (87%) say that infrastructure met or exceeded their expectations in 2019, said the report, 'Preqin Investor Outlook Alternative Assets H1 2020'. This is on par with previous years, although the proportion whose expectations were exceeded has declined slightly in the past two years.

While their enthusiasm may be cooling slightly, investors are upbeat about 2020 performance prospects.

The proportion that feels that returns in the next 12 months will exceed those of the previous 12 months has jumped up from 15% at the end of 2018 to 22% a year later.

The proportion that feels returns will slacken, meanwhile, has dropped from 26% to 14%. This newfound optimism is likely because investors foresee a more settled macro-investing landscape in 2020, with less volatility anticipated and worries about interest rate rises receding.

94% of investors to maintain or increase allocations to infrastructure

As such, it is unsurprising that 94% of investors intend to maintain or increase their allocations to infrastructure in the longer term.

It is worth noting, though, that the share of respondents looking to increase their allocations fell from 55% in 2017 to 50% in 2018, and again to 43% in 2019.

This suggests that investors are starting to approach their target allocation rates, and are unlikely to increase them beyond around 5% of assets.

Concerns over asset pricing squeeze

Infrastructure investors are expecting a more settled year in 2020. When asked about the key challenges to return generation back in 2018, significant proportions cited rising interest rates and volatility in equity, currency, and commodity markets.

A year later and survey respondents are less concerned by these factors, having seen positive moves to resolve US-China trade tensions and a more dovish tone on interest rates from central banks in developed economies.

Asset pricing and competition for assets remain the key concerns and were cited by 49% and 40% of investors respectively.

Half of the investors believe asset pricing is higher now than it was 12 months ago, continuing a trend seen in the past several years. That said, 40% feel assets are now overvalued, which compares with 47% a year ago, and almost half (49%) think assets are fairly valued.

The asset class has more potential outlets to escape pricing pressure than either private equity or real estate - such as the explosion of the renewable energy industry - and it seems investors are confident these will keep the deals market from overheating.

Seeking safe havens

While they might be confident in infrastructure overall, investors are nonetheless seeking to reposition themselves slightly for the year ahead.

"We see a shift toward more known quantities in terms of fund manager relationships and geographies targeted, alongside a move toward higher-risk strategies," said Preqin.

The largest proportion (61%) of investors will invest with a mix of pre-existing managers in their portfolio and those new to them, but a further 17% are exclusively targeting re-ups.

The proportion of investors targeting only developed markets has jumped from 39% at the end of 2018 to 46% a year later.

Investors' risk appetite is growing as they seek to preserve returns. The proportion of investors targeting higher-risk opportunistic and value-added strategies has jumped by six and four percentage points to 39% and 30% respectively in a year, while the proportion targeting core funds has fallen slightly to 29%.

More investors are now seeking core-plus, value-added, and opportunistic investments than are seeking core funds - a first for the market. Return compression in highly competitive and expensive core sectors is leading investors to seek higher-risk/return investments to preserve future performance.

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