Infrastructure has attracted significant capital in recent years on the back of strong aggregate performance (as demonstrated in the chart above), persistently low yields in competing investments and supportive macro and capital markets environments.
We went back and scoured our proprietary dataset to identify nearly 500 unique infrastructure deals dating back to 2007. We separated these deals by geography and infrastructure subsector and compared their performance. What we found may surprise you.
The Myth of the Emerging Markets Premium: First, we did not identify any meaningful return premium earned in emerging markets. We frequently hear from infrastructure investors that emerging markets are less competitive and in greater need of infrastructure investment. While we believe the thesis, historically speaking, developed markets have outperformed emerging markets, with lower downside risk.
The Infra Report Card: Second, all subsectors of infrastructure have performed well, with only power transmission deals demonstrating fourth quartile returns that were negative. Midstream and power generation had wider return dispersions than other sectors, but still generated compelling median returns. Transportation sectors, including airports, shipping, rail and parking infrastructure, also demonstrated strong returns, albeit with lower deal counts than other sub-sectors. Lastly, telecom and data-related infrastructure has attracted significant interest from our infrastructure GP partners. In looking at the deal-level returns, it is easy to see why. As seen in the chart above, across all of the telecom deals that we tracked, fourth quartile returns were 14%, with median returns of 34.6%. Not too shabby.
What do these historically strong returns mean for future capital deployment? We would argue that prudence and discipline remain key to effectively allocating infrastructure capital today. The historical performance is, no doubt, impressive, but when considered in light of the life cycle of infrastructure as an institutional asset class, we believe the historical returns should be viewed with some degree of caution. Infrastructure is still a relatively nascent asset class, though that is starting to change. Significant capital flows and the resulting expansion of market participants will undoubtedly increase competition for deals going forward. With that in mind, investors should moderate return expectations and follow a disciplined plan for capital deployment going forward.
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The following hypothetical example illustrates the effect of fees on earned returns for both separate accounts and fund-of-funds investment vehicles. The example is solely for illustration purposes and is not intended as a guarantee or prediction of the actual returns that would be earned by similar investment vehicles having comparable features. The example is as follows: The hypothetical separate account or fund-of-funds consisted of $100 million in commitments with a fee structure of 1.0% on committed capital during the first four years of the term of the investment and then declining by 10% per year thereafter for the 12-year life of the account. The commitments were made during the first three years in relatively equal increments and the assumption of returns was based on cash flow assumptions derived from a historical database of actual private equity cash flows. Hamilton Lane modeled the impact of fees on four different return streams over a 12- year time period. In these examples, the effect of the fees reduced returns by approximately 2%. This does not include performance fees, since the performance of the account would determine the effect such fees would have on returns. Expenses also vary based on the particular investment vehicle and, therefore, were not included in this hypothetical example. Both performance fees and expenses would further decrease the return.
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Any tables, graphs or charts relating to past performance included in this presentation are intended only to illustrate the performance of the indices, composites, specific accounts or funds referred to for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision.
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As of March 10, 2020