Dispersion of Infrastructure Returns

October 03, 2019

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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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. 

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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 (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorized and regulated by the Financial Conducts Authority. In the UK 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 October 3, 2019

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