Headline valuations associated with infrastructure transactions have, for years, been subject to mockery, skepticism or a more subtle roll of the eyes, with airports, data centers and towers considered usual suspects. Although the nascent asset class has more or less gone mainstream, higher rates and macroeconomic uncertainty haven’t allayed such oft-cited concerns. So, what do we make of infrastructure valuations in today’s environment?
To kick off, let’s consider the secondary market for private infrastructure investments. Surely, institutional buyers would apply a healthy discount to account for concerns around individual asset valuations, with the potential for an additional spread given favorable supply/demand dynamics observed in the secondary market more broadly, right? “So… why are we bidding x% of NAV for an interest in a leading infrastructure fund?” posed an unnamed HL executive at a recent IC discussion. The question was a good one considering the double-digit discounts observed for PE secondaries (and single-digit discount in question). The question could be addressed in a number of different ways, but at a very high-level, our bottoms-up underwriting analysis supported the price at hand in this particular example, as did (and does) the market.
Secondary Pricing % (Discount)/Premium
What does the market see in infrastructure to justify persistently healthy pricing? The essential and long-dated nature of infrastructure assets, paired with strong visibility into future cash flows, makes the asset class particularly well-suited for secondaries for both buyers and sellers, allowing sellers to secure strong value, and buyers to have confidence in what they are acquiring.
This still doesn’t solve for the visceral reaction elicited by any reference to infrastructure transactions trading at 25x+ pick-your-valuation-measure. After all, you may say, infrastructure centers around physical assets such as data centers – not chasing the unicorns that reside in the cloud. So, what do we think about acquiring a portfolio of cell towers for 30x tower cash flow (“TCF”) – is that cheap or expensive? How about 45x TCF? Like most things in life, the devil is in the details, although in the case of the latter, outliers can be easy to spot.
Tower Portfolio Valuation
TCF MULTIPLE VS. TENANCY
Valuation Per Tower ($000) vs. Tenancy
Illustrative Tower Economics
|Tenancy Per Tower||1.0x||2.0x||3.0x|
|Tower Cash Flow||$10,800||$36,000||$61,200|
|Build Multiple (xTCF)||32x||10x||6x|
Source: Hamilton Lane adaptation of American Tower Corp illustration.
The redacted transaction comps shown above are a testament to substantial operating leverage associated with towers, as well as the significant value creation associated with increasing tenancy. How? Increased rents effectively flow directly to the bottom line, with higher cash flow multiples required to account for higher growth potential. Although simple to illustrate, towers are not unique in that headlines often obfuscate a more complex reality. Market commentary around data center take-privates such as QTS, Switch and CyrusOne are prime examples. Digging a bit deeper on each of these may or may not paint a different picture, depending on the example used.
Let’s instead turn to Hamilton Lane’s proprietary infrastructure dataset. Are higher purchase price multiples associated with lower returns? We’ve scrubbed and sliced our proprietary data set in a number of ways and can confidently say that higher headline purchase multiples (EV/EBITDA, in this case) are not correlated with lower returns on average, as illustrated in the exhibit below. This speaks to the market as a whole pricing infrastructure assets rationally.
IRR vs. Purchase Price Multiple
Are we buyers of infrastructure at any price? Absolutely not. After all, paying more for an asset upfront is a guaranteed way to reduce future returns, all else being equal. Likewise, although we’re excited about the opportunity set to invest behind key themes such as the energy transition and digitization, buyer beware: Not all opportunities are created equal. While the world migrates to the cloud, infrastructure as an asset class remains grounded in reality.
We cover more on this and other compelling areas within private infrastructure in our 2023 Real Assets Market Overview.Fill out the form below for an instant download of the deck.
2023 Real Assets Market Overview
This presentation has been prepared solely for informational purposes and contains confidential and proprietary information, the disclosure of which could be harmful to Hamilton Lane. Accordingly, the recipients of this presentation are requested to maintain the confidentiality of the information contained herein. This presentation may not be copied or distributed, in whole or in part, without the prior written consent of Hamilton Lane.
The information contained in this presentation may include forward-looking statements regarding returns, performance, opinions, the fund presented or its portfolio companies, or other events contained herein. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control, or the control of the fund or the portfolio companies, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect our current judgment, which may change in the future.
All opinions, estimates and forecasts of future performance or other events contained herein are based on information available to Hamilton Lane as of the date of this presentation and are subject to change. Past performance of the investments described herein is not indicative of future results. In addition, nothing contained herein shall be deemed to be a prediction of future performance. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable, but the accuracy of such information cannot be guaranteed.
This presentation is not an offer to sell, or a solicitation of any offer to buy, any security or to enter into any agreement with Hamilton Lane or any of its affiliates. Any such offering will be made only at your request. We do not intend that any public offering will be made by us at any time with respect to any potential transaction discussed in this presentation. Any offering or potential transaction will be made pursuant to separate documentation negotiated between us, which will supersede entirely the information contained herein.
Certain of the performance results included herein do not reflect the deduction of any applicable advisory or management fees, since it is not possible to allocate such fees accurately in a vintage year presentation or in a composite measured at different points in time. A client’s rate of return will be reduced by any applicable advisory or management fees, carried interest and any expenses incurred. Hamilton Lane’s fees are described in Part 2 of our Form ADV, a copy of which is available upon request.
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.
Hamilton Lane (Germany) GmbH is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (Germany) GmbH is authorised and regulated by the Federal Financial Supervisory Authority (BaFin). In the European Economic Area this communication is directed solely at persons who would be classified as professional investors within the meaning of Directive 2011/61/EU (AIFMD). Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients.
Hamilton Lane (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorised and regulated by the Financial Conduct Authority (FCA). In the United Kingdom this communication is directed solely at persons who would be classified as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance. Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients.
Hamilton Lane Advisors, L.L.C. is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the financial services by operation of ASIC Class Order 03/1100: U.S. SEC regulated financial service providers. Hamilton Lane Advisors, L.L.C. is regulated by the SEC under U.S. laws, which differ from Australian laws.
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.
The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.
The calculations contained in this document are made by Hamilton Lane based on information provided by the general partner (e.g. cash flows and valuations), and have not been prepared, reviewed or approved by the general partners.
As of June 7, 2023