Over the last decade private markets have become an integral part of capital markets, not only as a provider of capital where public and governmental funding cannot plug the gap, but also as a tool for institutional investors to diversify their portfolios. They also offer some protection against global market volatility and inflation spikes, and are a source of funding when the traditional banking avenues are unavailable.
Since the global financial crisis of 2007–2008, private markets – in which we include private equity, private debt, private real estate and private infrastructure – have proved especially resilient, enjoying strong tailwinds, such as low interest rates, high credit availability and consistently healthy increases in valuations. Even though they are now facing more challenging times, mostly on fundraising and repricing, private markets have continuously outperformed their public market peers over the past two decades1.
Given this, the appeal of private markets has caught the attention of institutional investors (pension funds, insurance companies and family offices) and private clients alike. This should not come as a surprise, because after all, aren’t all investors after the same benefits – attractive risk/return profiles, diversification, low correlation to public markets and access to previously inaccessible strategies and markets?
Although private market strategies are still dominated by institutional money, they are fortunately becoming much more accessible to all. The ways to access private markets through collective investment vehicles are manifold but, in this case, let’s consider two in particular. One option is to invest through a fund of funds. Lower sourcing requirements, partnerships with established managers (known as ‘general partners’), and high-level diversification with relatively mitigated risk make this strategy attractive. The other option, and indeed one gaining much more traction amongst investors, is co-investments: through these, investors reap the benefits of the general partner’s experience as a manager, sourcing capabilities and relationship networks to find deal opportunities, along with fee savings, better terms and higher return potential – although the stronger exposure to a single transaction raises the risk.
While we can see definite advantages to investing through all strategies, private infrastructure has clearly had an edge in recent years. In Switzerland, investor interest was further boosted by the amendments to the Swiss occupational pension plan ordinance (BVV2), allowing an allocation of up to 10% in the asset class, outside of alternative investments. European inflows into private infrastructure totalled USD 32.3 bn in Q2 2023, according to Preqin, and a huge amount of that has been directed at energy transition infrastructure. At the end of September 2022, assets under management in unlisted infrastructure investments stood at USD 454.5 bn, of which USD 321.3 bn was energy-focused2.
Recent geopolitical events in Europe have further accelerated the drive to achieve energy independence by developing renewable energies. The infrastructure asset class has also proven its resilience during several economic downturns, including the pandemic and the subsequent high inflation. So far, financial performance and valuations in infrastructure have remained solid. The transformation of certain sectors will require investment in new infrastructure assets or adaptations to existing ones – renewable energy capacity, smarter energy storage, grids, water and waste treatment, recycling facilities, decarbonisation of logistics chains and transportation, and the expansion of data transmission, storage and usage.
These developments promise the next generation of infrastructure without affecting the key characteristics of the asset class: downside protection, visible or recurring cashflows, high barriers to entry, low volatility, inflation mitigation, and strong regulatory frameworks. It is no wonder, then, that institutional investors are increasingly seeking out private infrastructure, given the segment’s strong track record coupled with a momentous opportunity to invest in markets where public and corporate funding will fall short.
[1] Source: Hamilton Lane Data via Cobalt, Bloomberg (January 2023)
[2] Preqin report: Infrastructure and Energy Transition in Europe Q2 2023
Christophe Gantenbein