At Young Research, infrastructure assets have long-been one of our most favored investment sectors. The business models of many infrastructure businesses have appeal. The competition is limited, the cash flows are stable, the revenue streams are often inflation-adjusted, and the dividend payout ratios are generous. Recently, we have been less active in the space than in years past. Why? Great businesses don’t always make great investments.
As the Financial Times reports, institutional investors have been pouring billions into infrastructure assets in search of yield. A prolonged period of ultra-low interest rates across the global investment landscape has resulted in a surplus of money chasing too few projects.
We continue to favor the sector, but a more selective approach is now the mandate.
The FT has more.
Private investment in infrastructure assets soared last year as fierce competition for roads, airports, ports and power plants pushed prices higher.
Investment in global infrastructure assets hit a record $413bn in 2016, a rise of 14 per cent on the year before.
But although the deal value rose from $362bn to $413bn in 2016, the number of deals held steady at 1,772, showing that there is still a surplus of money chasing too few projects.
The number of deals has stayed at between 1,700 and 1,800 a year since 2013, according to Preqin, which provided the data.
Tom Carr, head of real assets products at Prequin, said: “Demand for infrastructure has increased over the last decade, [so] greater competition for assets — particularly secondary stage [already-built and operating] assets in developed economies — has pushed valuations upwards.
“Low interest rates have also contributed to higher pricing demands, as leverage becomes cheaper.”
Read more here.
Jeremy Jones, CFA
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