Increasing opportunity Private and listed infrastructure markets

UBS Asset ManagementFor professional / qualified / institutional investors only.

Since the mid-1980s, there has been a transformation in the ownership of the world’s economic infrastructure. Investors seeking the long-term, stable returns that come from owning and managing infrastructure assets are leading this transformation.

While less mature and smaller than other asset classes such as private equity and real estate, infrastructure investment is large and growing. Equity assets under management (AUM) for unlisted infrastructure fund managers recently reached $418 billion, a 16% CAGR over the past ten years.1 The reason for the growth in AUM is the unique profile of the asset class that makes this a particularly attractive opportunity for investors:

Asset fundamentalsAs long-lived, real assets delivering essential services, infrastructure has a distinct risk-return profile that investors value. Specifically, the assets tend to generate stable, long-term, often inflation-linked cash flows that translate into steady income across economic cycles that match investors’ long-term liabilities.

1 Preqin June 2017

Market fundamentalsThere is a growing global need to upgrade existing infrastructure, as well as expanding demand for new infrastructure. Additionally, a scarcity of capital from traditional sponsors such as local and federal governments is creating an investment gap that private capital is increasingly addressing.

Infrastructure demand and supply fundamentals are creating a growing global market opportunity for investors.

It is estimated that approximately $69.4 trillion needs to be invested in global infrastructure by 2035.2

According to the McKinsey Global Institute, the world needs to spend $3.7 trillion annually through to 2035 on transportation, power, water, and telecommunication systems to support current economic growth projections, as depicted in Figure 1. This figure, which is equivalent to about 4.1% of global GDP, is for networked economic infrastructure, a subset of McKinsey’s broader definition of infrastructure, which includes social infrastructure as well as real estate and backbone systems for oil, gas, and mining.3

2 McKinsey Global Institute, Bridging Infrastructure Gaps, has the World made Progress?, October 2017.3 Ibid.

Infrastructure is one of the fastest growing asset classes globally, with investors’ target allocations increasing significantly over recent years. Traditionally provided almost exclusively by governments or owned by strategic corporate entities, infrastructure across the globe is increasingly built, financed, and operated by the private sector and financial investors.

Stephen DowdCBRE Caledon Head of Private Infrastructure

Jeremy Anagnos, CFACBRE Clarion Securities CIO – Listed Infrastructure

1 Preqin June 2017

2 McKinsey Global Institute, Bridging Infrastructure Gaps, has the World made Progress?, October 2017.

3 Ibid.

Figure 1: $3.7 trillion annual investment in economic infrastructure needed through to 2035 to keep pace with projected growth

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Source: McKinsey & Company

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Growth in demand is a secular trend Growth in demand is coming from two sources:

(i) the growing need to upgrade and improve existing infrastructure in the more mature and slower growing OECD countries, and

(ii) the need for new infrastructure in developing countries driven by economic, population, and urbanisation trends.

Regarding supply, the scarcity of capital from traditional sponsors such as governments and strategic corporations or construction companies is creating a widening financing gap and growing market opportunity for private investment.

In recent years, constrained government budgets and competing interests for scarce public funds have led to chronic under-investment for maintaining existing assets and building new infrastructure. Across the globe, there is a clear trend in the declining percentages of GDP spent on infrastructure. Growing financial demands on governments, combined with their restricted ability to raise taxes and debt, suggest that this is a secular trend.

A robust market for private capital investment

Infrastructure assets are increasingly changing hands between private buyers, facilitating a growing marketplace removed from direct government involvement (figure 2). The confluence of public sector budget shortfalls and increasing private investor appetite for infrastructure assets has resulted in governments shifting infrastructure investment and operating responsibilities to the private sector. The involvement of private capital in infrastructure investment has been increasing over the years. The increased interest allows investors to benefit from the attractive investment characteristics of the infrastructure asset class. Governments can realise proceeds from the privatisation of assets, limit future funding obligations, and reap the potential upside from the experience and expertise of the private sector in the structuring and execution of projects and asset operations.

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Key investment themesThe infrastructure investment universe is broad and encompasses a range of sectors. Our definition of infrastructure narrows the universe to the marriage of essential assets with predictable cash flows. These long-duration assets are difficult to replace and benefit from their monopolistic position by having defined revenue streams. Infrastructure sectors include transportation assets (e.g. ports, airports, toll roads and railroads), electric distribution grids (e.g. utilities), midstream assets (e.g. pipelines for oil and natural gas), systems to support communication networks (e.g. wireless towers and data centers) and social infrastructure (e.g. schools, prisons, hospitals).

While the need for investment in infrastructure spans all sectors, two key sectors to highlight based on the current fundamentals, regulatory, societal, and capital market trends, are renewable energy and communication infrastructure.

Renewable energy: secular tailwinds and cost parityRenewable power is well-entrenched and riding strong tailwinds as the world transitions towards clean energy that will promote growth for many years. Robust customer demand is a key factor that is bolstering renewable development as corporations have been expanding their renewable procurement, much of it voluntarily driven. Cost efficiencies and technological breakthroughs are also poised to make unsubsidised renewable energy, primarily wind and solar, an economic reality. Wind and solar energy are attracting investment, and the projected growth of capacity at the expense of coal are supportive of the long-term investment opportunity (figure 3). Importantly, the private sector, as opposed to government, is leading the way in renewable energy investment, accounting for 92% of the $263 billion4 invested in 2016. Opportunities for infrastructure investors are global and favour those with scale and development expertise.

4 14 January 2018. Investments in Renewables Bringing Record Capacity Online. Retrieved From www.irena.org.

Figure 2: Deal flow is increasingly active

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No. of deals Aggregate deal value ($bn)Source: Preqin March 2018

Figure 3: Renewable energy growth at the expense of coal

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Source: World Energy Outlook 2017, IEA

Figure 4: Growth in data is an unabated trend with a long secular tail

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Source: Cisco VNI, 2017. One petabyte is one quadrillion bytes.

4 14 January 2018. Investments in Renewables Bringing Record Capacity Online. Retrieved From www.irena.org.

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Communication infrastructure: enabling technological innovationOur world has rapidly become one of data which enables digital technology. In fact, 90% of the world’s data was created in the past two years5. Fiber networks, data centers, and cell towers are the essential communication infrastructure assets that support the exponential growth in data and computing. Forecasts suggest the need for such critical infrastructure will only grow stronger as the world marches towards the Internet of Things (IoT), 5G, Artificial Intelligence (AI), Virtual and Augmented Reality (AR/ VR), Autonomous Vehicles (AV), Cloud Computing and new use cases yet to be developed. The ongoing capital needs faced by carriers, broadband and content players and technology firms to develop these new services will increasingly lead to an ownership/leasing model. This will continue to drive growth and investment opportunity for owners and investors of communication infrastructure.

5 Loechner, Jack. 22 December 2016. 90% of Todays Data Created in Two Years. Retrieved from www.mediapost.com

ConclusionThere is significant need for new and updated infrastructure in both developed and developing economies. This translates into a broad and growing range of infrastructure investment opportunities. The capital investment need is increasingly being met by investor demand. As a relatively less mature asset class, infrastructure can present experienced investors with unique competitive advantages for capturing value through differentiated strategies. Investors seeking alternatives to traditional asset classes, while also desiring income and low volatility are making new and increasing existing allocations to infrastructure.

5 Loechner, Jack. 22 December 2016. 90% of Todays Data Created in Two Years. Retrieved from www.mediapost.com

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©2018 CBRE Global Investors. All rights reserved. The information in this document is confidential and meant for use only by the intended recipient. Acceptance and/or use of any of the information contained in this document indicates the recipient’s agreement not to disclose any of the information contained herein. The views expressed represent the opinions of CBRE Global Investors which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be per-ceived as investment advice or a recommendation for any investment. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While CBRE Global Investors believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Past performance of various investment strategies, sectors, vehicles and indices are not indicative of future results. Investing in infrastructure involves risk, and there is no guarantee that risk can be managed successfully. There are no assurances performance will match or outperform any particular benchmark. Indices are unmanaged and not available for direct investment.

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