Alternative Assets

30 Oct 2019

Heightened levels of investor uncertainty about the global economy, together with strong demand for income producing assets, has kept infrastructure in the vanguard of popularity in recent months.

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Both segments of the asset class, namely social (such as schools, hospitals, transportation and utility services) and renewable (solar and wind generation) projects typically have operating contracts that range from 15 to as much as 30 or more years and have high levels of inflation linkage in their future revenue streams.
 
The stable nature of these income flows, which in general, are relatively insensitive to fluctuations in economic activity has proved highly attractive to investors and the only real exception to this appetite occurred in the wake of Labour’s threats of nationalisation at their Autumn 2017 party conference, which prompted some temporary weakness in several share prices.  However the poor showing of Labour in the opinion polls in recent months has meant that such a prospect has receded from investors’ minds and share prices have made gains on a broad front.
 
During the year to date, Governments in many countries have either increased spending on infrastructure projects or pledged to do so and the funds have been able both to attract more investor capital and deploy it rapidly into either operational or development assets.
 
This enhanced scale has driven another benefit in the sense that the increased size of these funds and the concomitant improvement in the liquidity of their shares has enabled a number of large pension funds and insurance companies, who are attracted by the characteristics of the asset class but do not have the internal management capability to acquire the projects directly, to become significant shareholders.  Despite strong price performance, most of these funds can still offer long term indicative returns of over 6% net of their fees which is appealing compared with the likely future returns from both sovereign and corporate bonds.

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