Is the tide turning for listed infrastructure returns?
A comparison of listed and direct market valuations
Until recently, bond yields were in structural decline for several decades. During this time, investors saw valuations of almost all asset classes generally go in one direction – up. This also provided a very favourable outcome for levered investments. Private equity was a natural beneficiary of this environment due to the typically high debt levels used when financing their transactions. Unlisted infrastructure investments are one example of this, as anecdotally we observe that these assets utilise significantly higher leverage than equivalent publicly listed infrastructure assets.
In general, infrastructure assets have performed well over the past decade. For the 10 years to 31 December 2022, the listed infrastructure sector delivered 9.5% p.a. while the unlisted infrastructure sector delivered 11.4% p.a. (see Figure 1). We are commonly asked to what extent these return differentials should be viewed as ongoing differences between the listed and unlisted markets versus those caused by temporary factors.
Figure 1: Performance of listed versus unlisted infrastructure
Source: Bloomberg, EDHEC Infra, as at 31 December 2022.
Notes: Global Listed Infrastructure is represented by the FTSE Global Core Infrastructure 50/50 100% Hedged to USD (Gross) Index. Unlisted Infrastructure is represented by the EDHEC infra300 Equity Index (Local).
In the white paper, One Asset Class?, our colleague, Steven Kempler, compared infrastructure assets in the listed and unlisted market. He concluded that ultimately the underlying assets are equivalent – they are based on the same regulatory and legal constructs, with no discernible difference in management expertise. One difference between the two markets is the materially higher debt levels used in unlisted assets. Another key difference, in our opinion, is the higher valuations being paid in the direct markets. In our view, the valuation gap between the two markets has continued to expand over the past decade to unprecedented levels.
In considering performance over the past 10 years, we believe these two factors were key reasons behind the higher returns seen by unlisted infrastructure. The higher leverage in the unlisted markets was positive during a period when asset values were rising. Additionally, the widening valuation gap between the listed and direct markets has driven an even stronger performance outcome for unlisted infrastructure.
Figure 2: Listed versus direct infrastructure valuations over the past decade
Source: Bloomberg, Infralogic, Sentieo, MBA GLI internal research, as at 31 December 2022.
Notes: Global Listed Infrastructure is represented by the grossed-up weighted average EV/EBITDA of FTSE Global Core Infrastructure 50/50 Index constituents. Data uses broker consensus estimates and has been sourced from Bloomberg. It is substantially complete, although is missing a few data points due to either stocks not yet being listed or there being insufficient consensus estimates at any point in time. We have reviewed the data and are confident the results are not being distorted by any extreme individual data points. Unlisted Infrastructure is represented by the average EV/EBITDA of infrastructure transactions occurring within a given year. Analysis is based on approximately 240 infrastructure transactions occurring between 2013 and 2022. Past performance is not a reliable indicator of future performance.
It appears to us that the market does not fully appreciate the role these factors have played in the relative performance of listed versus unlisted infrastructure. Extrapolating further, we believe that of those who expect history to repeat itself, it is important to understand the implicit assumptions being made.
Our views on this are:
(1) Even if valuations between the listed and unlisted market remain at the current wide range (and returns for investors are driven solely by current earnings and earnings growth as opposed to multiple expansion), then listed infrastructure should produce higher returns than unlisted infrastructure, simply due to the very different earnings yields currently available to investors. In other words, the higher prices currently paid in direct markets will likely lead to a significantly lower ongoing earnings yield over time.
(2) For unlisted infrastructure to overcome this headwind and produce equivalent or better performance than listed – when investing in effectively the same assets – they will be dependent on one or both of:
(a) valuations of all assets continue to rise, so their higher leverage is rewarded; and/or
(b) the gap between listed and direct infrastructure valuations continuing to widen.
If either of these assumptions begins to reverse, then we would expect unlisted infrastructure returns to face greater performance headwinds relative to listed.
In conclusion, while many investors espouse the benefits of earning an illiquidity premium through private market asset returns, we believe these assets, based on current market valuations, are likely to be earning a discounted return relative to their listed counterparts. Said differently, while investors think they should receive an illiquidity premium in their returns, our view is that based on current purchase prices, it is likely they are receiving an illiquidity discount.
This wire was co-authored with Kevin Zeng, Investment Analyst, Global Listed Infrastructure, Maple-Brown Abbott. To read our full note on this topic please refer to the attached PDF.
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Andrew Maple-Brown started Maple-Brown Abbott Global Listed Infrastructure with three partners in 2012, holding the belief that the best way to align with investors was through a boutique ownership structure. With more than 20 years’ experience in financing and investing in infrastructure assets and securities, Andrew believes investing in infrastructure should include a focus on delivering inflation protection and lower volatility, the key investment characteristics of infrastructure assets. Previously, Andrew spent 11 years at Macquarie Group, the last five years as a Portfolio Manager within their Global Listed Infrastructure team, working in Sydney and New York. Andrew began his career at Lend Lease, where he worked for five years.
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Disclaimer
This information was prepared and issued by Maple-Brown Abbott Ltd ABN 73 001 208 564, Australian Financial Service Licence No. 237296 (“MBA”). Maple-Brown Abbott is registered as an investment advisor with the United State Securities and Exchange Commission under the Investment Advisers Act of 1940. This information must not be reproduced or transmitted in any form without the prior written consent of MBA. This information does not constitute investment advice or an investment recommendation of any kind and should not be relied upon as such. This information is general information only to wholesale clients (as defined by the Corporations Act 2001 (Australia Cth) and the Financial Markets Conduct Act 2013 (NZ)) and it does not have regard to any person’s investment objectives, financial situation or needs. Before making any investment decision, you should seek independent investment, legal, tax, accounting or other professional advice as appropriate. Past performance is not a reliable indicator of future performance. Any comments about investments are not a recommendation to buy, sell or hold. Any views expressed on individual stocks or other investments, or any forecasts or estimates, are point in time views and may be based on certain assumptions and qualifications not set out in part or in full in this information. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other MBA communications, strategies or funds. Information derived from sources is believed to be accurate, however such information has not been independently verified and may be subject to assumptions and qualifications compiled by the relevant source and this information does not purport to provide a complete description of all or any such assumptions and qualifications. To the extent permitted by law, neither MBA, nor any of its related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of the information contained herein, or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on any part of this information. Douse Associates (registered in England under No. 10837002 and authorised and regulated by the Financial Conduct Authority) is authorised to distribute this marketing communication to certain UK investors. Hyde Park Investment International Limited (incorporated in Malta, company reference number C 44733) is authorised to distribute this marketing communication to certain UK and EU investors.
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Co-Founder & Managing Director, Maple-Brown Abbott Global Listed Infrastructure
Maple-Brown Abbott
Andrew Maple-Brown started Maple-Brown Abbott Global Listed Infrastructure with three partners in 2012, holding the belief that the best way to align with investors was through a boutique ownership structure. With more than 20 years’ experience in...
Expertise
Co-Founder & Managing Director, Maple-Brown Abbott Global Listed Infrastructure
Maple-Brown Abbott
Andrew Maple-Brown started Maple-Brown Abbott Global Listed Infrastructure with three partners in 2012, holding the belief that the best way to align with investors was through a boutique ownership structure. With more than 20 years’ experience in...
Expertise
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