I’ve heard several times at our Institutional Investing in Infrastructure conference — including at this year’s event earlier this month — representatives of the California Public Employees’ Retirement System describe infrastructure as a “bespoke” asset class, meaning each infrastructure asset and investment is unique and not easily homogenized into neat and tidy sectors and risk-return profiles.
It’s tempting to view the infrastructure opportunity as only a collection of sectors and risk profiles because it can give a certain level of clarity and understanding, but investors should resist that temptation.
Experienced infrastructure investors will tell you individual investments should be reviewed on case-by-case basis, with each asset put under the microscope to determine the risks and potential returns. There are simply too many moving parts to parcel out commitments by ticking off sector, geography and risk-return profile boxes alone: different countries with different rules and regulations and political risks; different relationships to inflation and to economic growth; and, to complicate matters, many new managers who have yet to make a round trip investment from closing a deal to managing it to exiting.
This idea of infrastructure being a bespoke asset class is true on the capital formation side of the equation, too — each investor’s approach to the infrastructure opportunity is based on the unique make up of its beneficiaries and the portfolio objectives it assigns to infrastructure investments. Many investors want infrastructure to give them cash yield, diversification and inflation hedging with relatively low risks, but others see opportunity for capital appreciation and set up their infrastructure program to invest in higher risk-return opportunities.
Infrastructure investing is many things to many people.
The general warning for all, however, is don’t oversimplify. But when an investor is first learning about infrastructure investment, these sectors are certainly a useful way to make sense of the opportunity. And it also can be helpful to use a familiar risk-return framework to make sense of the opportunity — core, value-added and opportunistic, for example, to measure the risks and returns.
But the message I hear from our conference attendees and Editorial Advisory Board members is that a core, value-added and opportunistic model and rigid delineation of sectors is misleading if you don’t look deeper into all the other variables.
It is understandable why this happens — investment staffs need to understand and communicate a new investment class to boards of trustees and investment committees that are not as well versed as they are. So they fall back on models that their trustees and committee members are familiar with and understand in order to communicate the opportunity.
It’s a good start, but investors and their trustees and investment committees need to realize that just because an asset is in a particular sector that has a reputation for core assets or is in a developed country that has a track record of strong rule of law or a strong rate of growth, it is not necessarily a slam-dunk “core” investment.
Simply taking what works in real estate or private equity — the core, value-added and opportunistic risk-return framework and dividing the assets among their various sectors — is not necessarily wrong, but investors have to be careful not to embrace the comfort of the familiar only to later realize they oversimplified the opportunity and missed important details that will make or break an investment.
Author: Drew Campbell, senior editor of Institutional Investing in Infrastructure.