Documente Academic
Documente Profesional
Documente Cultură
The infrastructure
equity cycle
Infrastructure white paper series | Part 3
Institutional investor
interest in the
infrastructure sector
is at record highs.
This paper takes a
closer look at the
impact on valuations
and examines where
we are in the cycle.
This is the final installment of our infrastructure white paper series. Our first paper,
The case for infrastructure debt (click here ), provided a closer look at the growing
area of infrastructure debt. The second, Infrastructure and the economy (click here),
explored how infrastructure returns might perform under various economic scenarios,
particularly in a rising interest rate environment. This paper will examine where we are
in the infrastructure equity cycle, in terms of investment style and valuations, and
opines if the two are linked.
450
400
350 150
148
300
109
250 106
110
200
75
86
150
68 268
238
100 216
67 64 190
146 165
65 125
50 94
51 62
34
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
1
OECD (2018), Survey of Large Pension Funds and Public Pension Reserve Funds, 2016 2
Preqin, 2018 Preqin Global Infrastructure Report
3
Fund size of > USD 2 billion, Preqin
Page 2 of 8
Evolving investment style
The growth of the infrastructure sector means that investors Note on the MSCI Global Quarterly Infrastructure
now have a choice of managers across the risk-return Asset Index:
spectrum. As the real estate nomenclature of core, core-plus, The MSCI index is calculated in local currency and weighted
value-add and opportunistic is now firmly embedded in the towards Australia: 45% allocation as at December 2017.
infrastructure sector, we set out below an illustration of the Risk-free rates in Australia over the past five years have
typical return composition of each strategy. exceeded the G7 average by around 1.5%, resulting in
higher overall returns versus a USD-denominated index.
25.0
Core-plus
20.0
Value-add
15.0
Opportunistic
10.0
Source: UBS Asset Management, Real Estate & Private Markets, 2018
5.0
The illustrative returns above align well with the actual one-
year return composition from the MSCI index split by style 0.0
below. 1yr 2yrs 3yrs 5yrs
Low risk Moderate risk High risk
Chart 3: Composition of historical returns by risk style Source: MSCI Global Quarterly Infrastructure Asset Index, December 2017
(12-month return (%), local currency )
The rise of the mega-fund has contributed towards the record
25.0 fundraising and dry powder in the sector. Many mega-fund
managers were traditionally private equity players and this
may also be a contributor to the increasing percentage of
20.0 non-core strategies as shown in chart 5 below.
15.0
10.0
5.0
0.0
Low risk Moderate risk High risk
Page 3 of 8
Chart 5: Changing investment style Chart 6: Composition of returns by risk style
(Capital raised by primary equity strategy, %) (Quarterly return, %)
7.0
100% 4%
8% 7% 9% 7%
16% 15% 6.0
90% 10%
17% 20%
80% 18% 39% 5.0
23% 24%
70% 49%
24% 4.0
60%
50% 65% 46% 3.0
51%
40% 39% 39% 2.0
45%
30% 32%
51% 1.0
20%
30% 0.0
10% 22% 23% 21%
16% 18%
12%
0% (1.0)
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
2010
2011
2012
2013
2014
2015
2016
2017
Source: MSCI Global Quarterly Infrastructure Asset Index, December 2017 Source: MSCI Global Quarterly Infrastructure Asset Index, December 2017
The impact of the growing share of non-core strategies in the This suggests that the infrastructure sector is moving more
infrastructure sector can be seen in the 2017 total return from towards the core-plus, value-add style than core. This may also
the MSCI index which consisted of approximately 60% capital indicate that the sector is experiencing some style drift, with
return and 40% income return. managers seeking riskier transactions to meet stated return
targets as returns have compressed.
Chart 7: Low historical correlation between infrastructure and other asset classes
(Correlation coefficients (4Q07-4Q17)
Equities 1.0 - - - -
Page 4 of 8
The overall private infrastructure sector shows a historical However, as infrastructure investors become more aggressive
correlation coefficient with listed equities of 0.3, once we with their investment style, the riskier "infrastructure"
apply a lag of two quarters. Public markets price daily based investments perform more like public or private equity
on market fundamentals whereas the private market relies on investments, where capital appreciation tends to make up a
semi-annual or annual valuations. Therefore, we believe that large part of returns.
by applying a lag, the results are more closely aligned with
reality than showing the unlagged correlation coefficient with Riskier infrastructure investments therefore become correlated
equities of 0.02, noting that both methods have limitations. with other risky assets, which means an investor loses some of
the diversification benefits from investing in infrastructure in
While we don’t have robust data for core strategies, we the first place.
believe that an income stream from low-risk, stable assets
would have an even lower correlation with traditional asset Valuations
classes. From a diversification perspective, adding low Many commentators have incorrectly called the top of the
correlation assets to an existing portfolio improves risk- market over the recent past. Rather than trying to predict
adjusted returns, as measured by the Sharpe Ratio. when valuations might peak, we set out some late-cycle
signals and critically assess the differences from previous cycles
to provide some insights. Chart 8 shows the evolution of
infrastructure valuations from 2004 to 2017.
Chart 8: Late cycle - Valuations expensive by historical standards but returns offer significant premium to bonds
(EV/EBITDA multiples) (Bond rate,%)
18x 10%
16x 9%
8%
14x
7%
12x
6%
10x
5%
8x
4%
6x
3%
4x
2%
2x 1%
0x 0%
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Trailing 12M Avg EV/EBITDA (left axis) Trailing 12M Median EV/EBITDA (left axis) 10-year bond (G7 average, right axis)
Source: UBS-AM Proprietary Database, Mergermarket, InfraNews, Infrastructure Journal, Infrastructure investors, Bloomberg; August 2018
Page 5 of 8
Looking at the EV/EBITDA multiples in chart 8, valuations Conclusion
appear to be close to 2007 levels; however, the risk-free rate The infrastructure sector has proven itself as an attractive asset
in late 2007 was around 4% versus circa 1.5% today. This has class by providing diversification and strong returns. We
implications for both the cashflow of an infrastructure asset believe that infrastructure will continue to provide strong
and the attractiveness of the asset class. returns and play an important role in investors' portfolios.
Infrastructure assets are typically highly leveraged so the However, the record fundraising in the sector has also led to
impact of lower rates on an infrastructure company's cashflow an increasingly competitive market, fuelling rising valuations.
can be material. However, as EBITDA is calculated pre-debt In our view, these inflows have also contributed to a change in
service, the EV/EBITDA multiple does not adjust for the impact investment strategies. The sector has become more focused
of lower rates making the over-time comparison less on non-core strategies, many of which rely on capital growth
meaningful. to meet return targets. We believe that these strategies are
more highly correlated to other private and public equities,
The low yield environment has contributed to the meaning that investors will lose some of the portfolio benefits
attractiveness of private markets with investors seeking to of investing in infrastructure.
capture the premium which private markets can offer.
Infrastructure has further benefitted from its strong There are warning signs that we are late in the cycle:
performance (see chart 3). The increased interest in the asset managers are adopting riskier strategies and valuations look
class has led to return compression; however, relative to risk- expensive by historical standards. However, we believe that
free rates, which have also been falling, infrastructure some of the uplift in valuations can be justified by a lower
continues to provide an attractive premium. rates environment. Additionally infrastructure still provides a
significant premium over risk-free rates and looks attractive
High valuations are a topical theme across all public and relative to other private asset classes.
private equity markets as cheap money has driven up asset
prices. Private equity data published by McKinsey4 show that These nuanced arguments highlight the risks around calling
EV/EBITDA valuations increased by 1.9x from 2009-2017 peak valuations with some worrying signals offset by other
versus a 1.2x5 increase in infrastructure multiples. This makes credible mitigating factors. So, while we can't pinpoint where
infrastructure look attractive on a relative basis. we are in the cycle, we believe that if there is a market
correction, income strategies would outperform capital-driven
Our proprietary database is robust containing more than strategies as the income from stable infrastructure assets will
1,000 data points. The availability of data in private markets is continue delivering returns for investors.
limited so we have created an aggregate index to show the
overall trends. The limitation of an aggregate index is that the
data could be skewed by changing sector composition over
time; however, this would only have a meaningful impact if
the change concerned a switch to or from assets with above
or below average multiples.
Page 6 of 8
Page 7 of 8
This publication is not to be construed as a solicitation of an
offer to buy or sell any securities or other financial instruments
relating to UBS AG or its affiliates in Switzerland, the United
States or any other jurisdiction. UBS specifically prohibits the
redistribution or reproduction of this material in whole or in part
without the prior written permission of UBS and UBS accepts no
liability whatsoever for the actions of third parties in this respect. The
information and opinions contained in this document have been
compiled or arrived at based upon information obtained from sources
believed to be reliable and in good faith but no responsibility is
Infrastructure Research and Strategy
accepted for any errors or omissions. All such information and
opinions are subject to change without notice. Please note that past
Declan O' Brien performance is not a guide to the future. With investment in real
Alex Leung estate (via direct investment, closed- or open-end funds) the
underlying assets are illiquid, and valuation is a matter of judgment by
a valuer. The value of investments and the income from them may go
down as well as up and investors may not get back the original
amount invested. Any market or investment views expressed are not
For more information please contact intended to be investment research. The document has not been
prepared in line with the requirements of any jurisdiction
designed to promote the independence of investment research
UBS Asset Management
and is not subject to any prohibition on dealing ahead of the
Infrastructure Research and Strategy
dissemination of investment research. The information contained
in this document does not constitute a distribution, nor should it be
considered a recommendation to purchase or sell any particular
Declan O' Brien security or fund. A number of the comments in this document are
+44-20-7567 1961 considered forward-looking statements. Actual future results,
declan.obrien@ubs.com however, may vary materially. The opinions expressed are a reflection
of UBS Asset Management’s best judgment at the time this document
is compiled and any obligation to update or alter forward-looking
Follow us on LinkedIn statements as a result of new information, future events, or otherwise
is disclaimed. Furthermore, these views are not intended to predict or
guarantee the future performance of any individual security, asset
class, markets generally, nor are they intended to predict the future
performance of any UBS Asset Management account, portfolio or
www.ubs.com/infrastructure fund. Source for all data/charts, if not stated otherwise: UBS Asset
Management, Real Estate & Private Markets. The views expressed are
as of March 2018 and are a general guide to the views of UBS Asset
Management, Real Estate & Private Markets. All information as at
March, 2018 unless stated otherwise. Published September 2018.
Approved for global use.
© UBS 2018 The key symbol and UBS are among the registered and
unregistered trademarks of UBS. Other marks may be trademarks of
their respective owners. All rights reserved.
Page 8 of 8