Infrastructure investors seek volatility shelter

The low volatility and protection from inflation that infrastructure offers as an asset class are luring investors who are wary of the macro-economic risks that have put the brakes on a bull equities market.

Speakers at this year's Thomson Reuters Global Real Estate and Infrastructure Summit are set to offer a different perspective on the allure of infrastructure from 2010, when the prospect of another economic global downturn seemed more remote.

Concerns over the outlook of stretched and opaque financial markets in emerging countries have exacerbated anxiety about a US economic slowdown, contagion from the euro zone's debt crisis and pumped-up world inflation.

Infrastructure companies operate assets such as roads, airports and ports, which can enjoy natural monopolies, making their revenues less volatile and therefore more appealing to risk-averse investors.

Crucially, their cash flows are often inflation-linked, either because they are allowed by the state to index their charges or because their income comes from the state, which has agreed to make above-inflation payments.

Investors look for such assets when they seek to rebalance portfolios to take account of risks in equity markets and when reassessing the recent outperformance in returns of emerging market stocks compared with infrastructure indices.

In private equity, Asia infrastructure markets such as China have started to open up. Macquarie Group, the world's largest infrastructure fund manager, announced a Greater China infrastructure fund joint venture on Tuesday.

"We have a maximum exposure of 10% to emerging markets. They tend not to have the operating cash flow, inflation protection or dividend we are looking for," Roland Hantke, a UBS infrastructure fund manager, said this week.

In India, private equity investment in infrastructure has grown from about USD 1 billion in 2006 to USD 4 billion in 2010, a recent Bain & Company report found, predicting activity could grow 25-50% a year over the next three years.

The pipeline of initial public offerings in infrastructure is also growing as owners seek to cash in on investor appetite for assets that are perceived as safe.

These range from the infrastructure unit of Brazilian pension fund Previ and Russian port operator Global Ports, to Italy's Milan airport operator SEA.

Earlier this year, Hutchison Port Holdings, an infrastructure unit of Hutchison Whampoa, raised USD 5.5 billion in its Singapore listing, making it the largest IPO in Southeast Asia and the biggest in Asia to date.

With budgetary constraints in developed countries becoming tighter, infrastructure investors also see more opportunities in privatisations. Several emerging market governments are also looking to raise cash through selling state assets.

This is of major important for the debt-laden countries of euro zone's periphery, particularly Greece, which has failed to sell a single cent's worth of assets since getting a 110-billion euro EU/IMF bailout last year.