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How has listed infrastructure grown as an asset class?
We have already discussed the expected growth in the infrastructure asset class in a previous article, where we highlighted that this asset class is set to expand greatly over the coming years, with a leading economic think tank estimating the global stock of infrastructure doubling to more than $110trn by 2030*.
The role of the private sector in the provision of infrastructure is becoming greater and greater each year. Whilst the public sector dominated the infrastructure landscape until the latter stages of the 20th century, with governments planning, building, and operating the vast majority of infrastructure assets around the world, this started to change in the 1980s. 
In this period, we saw policy changes (led in part by the UK) transferring infrastructure assets to the private sector and highlighting the growing importance of markets to provide financing. In the following 30 years we have seen billions of assets sold to the private sector, which has operated, maintained and developed them.
When we then step forward to today, we find ourselves in a position where government debt has ballooned across the world and many governments simply don’t have the budget or appetite to fund infrastructure projects.
These projects include both bringing existing ageing infrastructure up to a better standard to meet current needs and investing in new infrastructure to meet the needs of growing economies and populations over time.
There is therefore a significant and growing role for private sector involvement – governments are frequently more enthusiastic on the idea of the private sector developing and operating infrastructure assets than the public sector having to carry the risk (and return) on its books.
Greater private sector involvement over time has also led to a greater ability to ensure they are fairly compensated for providing this infrastructure, through long-term contracts or regulatory frameworks that provide price and return stability over time.
What’s the difference between listed vs unlisted infrastructure?
‘Infrastructure’ as a term is often seen as synonymous with unlisted infrastructure (that which is not traded in public markets) and indeed at RARE we have an investment team that has significant experience in investing in both unlisted and listed assets. In fact, a founding principle of our firm was to replicate broadly the investment returns and approach available within the unlisted market to the public listed market. However, our view is that listed and unlisted infrastructure offer alternative ways for investors to gain exposure to the same asset class with the same attractive characteristics.
All else being equal, an infrastructure asset’s ownership structure (listed or unlisted) does not change its underlying cashflows or characteristics. Therefore, whilst listed infrastructure assets will mostly trade with listed equity characteristics in the short term, in the long term they should exhibit their true underlying infrastructure characteristics.
Nonetheless, there are practical differences between a minority investment position in a listed security and ownership of unlisted assets, with advantages and disadvantages for both.
With unlisted infrastructure, an investor may be able to exert a material level of control over the management of the infrastructure asset and the opportunity set is wider (unlisted infrastructure assets include social infrastructure assets which are not typically found in the listed infrastructure market, such as hospitals, prisons, and schools).
However, listed infrastructure has a deeper opportunity set (there are significantly more infrastructure companies to invest in globally then there are unlisted infrastructure projects), greater liquidity (resulting in a more flexible approach to entering and existing investments) and typically lower fees.
In addition, investing via the listed market provides the flexibility to enhance returns over time; it is our view that investors with a deep understanding of infrastructure markets, regulation, and the ability to model these over the long term, can more accurately value infrastructure companies than the typical participant in the market.
For example, investment professionals for whom infrastructure makes up a small proportion of their universe may apply a generic (potentially less rigorous) approach to valuing investments which we believe does not fully account for the rewards and risks of infrastructure assets and companies and thus can miss capturing the longer term opportunities.
It is important to recognise, that ultimately investment decisions in both listed and unlisted markets are based on the same criteria: in both cases, the aim is to identify investments which meet the investor’s long-term requirements and which generate a return that is sufficiently high to offset the risk.
In both cases, the most important determinants of value rely on long-term assumptions with the same uncertainties. Undertaking detailed diligence and considering longer term risks and opportunities is therefore crucial regardless of ownership structure. In both cases, this also means identifying elements that other potential acquirers of an asset have not reflected in their valuation, but will do at the end of an investment holding period.
Should investors take infrastructure through listed or unlisted? Is there an argument for holding both?
At RARE we believe that unlisted and listed infrastructure should be seen as complements rather than substitutes.
The significant differences in the types of assets that you can gain exposure to through investing in the listed and unlisted markets leads to different sector and regional risk exposures offered by the two markets. We think that this can be underappreciated by investors and that by allocating to both unlisted and listed infrastructure investors can optimise their risk and return exposures, and improve portfolio construction efficiency.
In addition, the persistent market mispricing that can be seen in both markets (in different assets and at different times), provides a further rationale for holding an allocation to both unlisted and listed infrastructure.
*Source: David Hale Global Economics (2014) and RARE, as at 31 December 2014
Nick Langley is a founder, co-chief executive and co-chief investment officer at RARE Infrastructure. The views expressed above are his own and should not be taken as investment advice.
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