Trends Watch: Infrastructure

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Michael Underhill, Chief Investment Officer & CEO, Capital Innovations.   

What is your outlook for infrastructure investing?

The Inflation Reduction Act (IRA) is an historic landmark in U.S. law-making that is estimated to grow the U.S. renewables market from $64 billion in 2022 to nearly $114 billion by 2031. In turn, many other industries are being indirectly and positively impacted by the passing of that law. We feel it's critical that investors take advantage of this opportunity and capitalize and pursue investments in renewable energy production and infrastructure deployment as well as opportunities in the energy transition, digital transformation and enhancement/asset improvement of aging infrastructure.

Where do you see the greatest opportunities and why?

Power, energy infrastructure, communications, transportation/logistics and select social infrastructure/public private partnerships. The infrastructure debt market was once almost exclusively the domain of banks. In the past, institutional investors who did gain access to infrastructure assets generally did so through allocations to private equity funds. The key events that set change in motion were the global financial crisis (GFC) and the European debt crisis. As banks looked to reduce their liquidity and pulled back sharply as a funding source, institutional asset managers were able to step in and fill the gap—particularly in the U.S., where banks still act as arrangers but are typically not involved in lending to the same extent as in Europe.

Infrastructure debt is a global asset class and can be an effective diversifier in a portfolio that already includes more traditional, long-term fixed income assets such as sovereign and public investment grade corporate bonds. Whereas public debt is heavily concentrated in the industrial, financial, and utility sectors, private placements and infrastructure projects span rated and unrated public and private debt, as well as a wide range of industry sectors and sub-sectors—all of which exhibit unique return profiles.

Secondaries can be an attractive way to access infrastructure. For both investors new to infrastructure as well as established investors, infrastructure secondary investors provide liquidity to the private markets by allowing:

• Infrastructure managers to offer liquidity to their investors while retaining control of their investments (non-traditional secondaries); and
• Limited partners to generate realizations ahead of the natural termination date of their investments (traditional or LP secondaries).

We estimate that non-traditional secondaries comprise approximately 70-80% of the market.

What are the greatest challenges you face and why?

Educating investors regarding infrastructure as an asset class. Investors can adjust the alternatives asset allocation to achieve specific benefits utilizing an increased allocation to infrastructure that helps investors generate income and protect purchasing power.

In addition, according to EDHEC’s Infrastructure & Private Assets Research Institute, other challenges faced by infrastructure funds include performance measurement due to a dearth of available data and not being risk-free._[1]  

What keeps you up at night?

My 75-pound Rhodesian Ridgeback dog but in all seriousness, global events spanning COVID-19, monetary policy, inflation and subsequent economic repercussions have created challenging capital markets for global investors and are leading to liquidity issues in the capital markets further increasing volatility and complexity in both public and private markets.

The recent attention drawn to retail alternatives has been focused on liquidity and redemptions, but not asset type, portfolio management and asset liability matching required to manage these types of portfolios.

The challenge for fund sponsors and their portfolio management teams, more generally, will be more “surgical asset allocation” within their portfolios moving forward as we progress through a higher interest rate environment for a longer period of time, which is quite different than the accommodative rate environment from 2012-2021.

We see the challenge for retail investors as spending more time with their financial advisor so they can truly understand their own goals, communicate those goals effectively to their advisor in order that both parties may manage for better outcomes.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.

[1] EDHECinfra Research “highly commended” in the 2022 FT academic research awards | EDHEC BUSINESS SCHOOL