It’s the early 1990s. Michael Jordan is just getting into his stride with the Chicago Bulls. Microsoft and Apple are still competing for dominance of the PC market. And grunge rock - a la Nirvana and Soundgarden - is dominating the Billboards along with its trademarks of flannel and torn denim.
Meanwhile, there’s a new asset class being pitched to institutional investors called “infrastructure” that is characterized by capital-intensive, physical assets in high-barrier-to-entry industries that provide essential services to society and critical, global supply chains. The believers are saying that performance should be stable and attractive since the assets are typically tied to long-term contracts with credit-quality counterparties. Performance should be somewhat similar to real estate, in that infrastructure has bond-like qualities stemming from the recurring cash flows tied to the long-term contracts, and stock-like qualities that can come from the improvement of cash flow quality or through EBITDA growth. It sounds like a good thesis, but it’s early days. So, most investors take a wait-and-see approach.
**Sitcom dream sequence ends and we’re back in 2019, with more than two decades worth of data at our disposal. **
Let’s see how the thesis from the ’90s played out:
Over the 22-year period of analysis, infrastructure as an asset class has produced favorable returns with a much tighter dispersion of performance than the broad private markets. With a median IRR of 8.0%, infrastructure only narrowly underperforms the broader market IRR of 9.5%. In addition, the dispersion of outcomes between the top and the bottom quartile break points is only 716 bps -- that’s over 500 bps tighter than the broad private markets! The only private market asset class to have tighter dispersion is credit, at 613 bps, which makes sense as it is closer to a fixed income asset class at its core.
Like any asset class, within infrastructure there’s a range of strategies with differing risk profiles. If you were to parse through the infrastructure data set, you’d find that core and core plus (lower risk) strategies tend to cluster around the median. The constituents that have produced top- and bottom-quartile performance tend to be those that layer on value add and opportunistic risks (higher risk), such as commodity price exposure, merchant pricing or greenfield development. That’s not to say that these higher-risk strategies are binary in their outcomes, but instead to illustrate that strategies that stick to the hallmark characteristics of infrastructure tend to produce more consistent returns.
Now, if only we had access to a Delorean and a flux capacitor we could make like Marty and McFly back to the early 1990s…
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As of October 3, 2019