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OPINION OF THE WEEK: Infrastructure – The Asset Class With Big Political Clout

Tom Burroughes Group Editor 22 January 2024

OPINION OF THE WEEK: Infrastructure – The Asset Class With Big Political Clout

BlackRock's acquisition of a $100 billion infrastructure investment firm a few days ago is a sign of how significant this asset class is.

Ask any disgruntled motorist who has had to repair the car's suspension after hitting a pothole, or someone left fuming by spotty internet, and you get a sense of how sub-par infrastructure is a big political and therefore important investment topic.

And for that reason, given that we are in a world of expected moderate stock market returns, and unlikely to see a return to ultra-low interest rates any time soon (a good thing, in my view), there is a need for yield-generating assets for the long term. That means infrastructure. 

Some notion of how things are changing came earlier in January when asset management titan BlackRock (more than $10 trillion in AuM at end-2023), announced that it had acquired Global Infrastructure Partners (GIP). Acquiring GIP has created a business with a combined $150 billion of assets under management. In December last year, Middle East alternative investment firm Investcorp bought a 50 per cent stake in the $4.8 billion infrastructure business of US firm Corsair Capital, to give another example. For years, Australia's Macquarie has been a big player in the space.

Getting into the infrastructure sector seems increasingly urgent – and obvious in investment terms. As consultants McKinsey & Co said in an August 2022 note: “There are deeper, more gradual ways in which the asset class is changing – and investors need to change with it. Revolutions in energy, mobility, and digitization are introducing new dynamics to existing infrastructure investments that previously appeared almost impervious to change. At the same time, economic and social transformations are introducing new types of investments that represent opportunity for investors.”

Firms such as BlackRock tend to be bellwethers. Just as BlackRock has vigorously touted its ESG credentials (controversially so, at times), its deal last week suggests that it sees infrastructure as hot. And this is also happening, let’s not forget, in an election year in more than 40 countries, including the UK and US. 

Infrastructure can be a political hot issue: Crumbling roads, overcrowded airports, cramped schools, or uneven electricity power generation, for example, rile voters. Politicians of all parties (think of Trump in 2016, and just about any Labour politician in the UK since time immemorial), say they want to improve infrastructure. Who doesn’t? Whatever one thinks of net zero and decarbonization, this means big-ticket items such as windmills, solar farms, nuclear power stations, and more. And even when governments curb expensive projects, such as with the UK’s ill-fated HS2 high-speed rail project, politicians think they must explain how money will be used on different projects instead.

Infrastructure also taps into a term I encounter in wealth management: “patient capital.” This is the idea that certain sources of capital can, because of the way they are structured, wait for years to see returns. Family offices, sovereign wealth funds, endowments and philanthropic foundations can fall into this category. Consider shipping firms – sometimes family-owned businesses with a family office on the side. Examples include the Danish Maersk family and the French dynasty, Saade.

Infrastructure covers a wide range of activities, and definitions can be fuzzy. There is often (but by no means always) an association with government. Roads, railways, ports, docks, airports, student accomodation, sports facilities, power stations and grids tend to be built either by states, or the state regulates the pricing at the retail end, as well as dealing with matters such as compulsory purchases and planning. The state often gets involved because infrastructure is what economists routinely call a “public good,” and the argument goes that these entities would be under-supplied under laissez faire capitalism. (Not everyone agrees with that, but that is another story.)

Also, in certain cases, the state often offers a measure of inflation protection. But there is political risk, and the danger that governments will go sour on a project, or decide to change the rules. Consider the problems in the UK Private Finance Initiative (PFI) a few years ago. PFI has been used to place a great amount of debt "off-balance-sheet," some argue. In October 2018, the chancellor, at that time, Philip Hammond announced that the UK government would no longer use PFI. Governments, as in the UK and in California in the early Noughties, have curbed the ability of electricity retailers to hike prices when wholesale prices rose, squeezing profits, or worse.

Not all infrastructure has to involve the state. Logistics warehouses can be entirely private, for example. In a slightly less purist example, toll roads are an attempt to “price” the cost of using a road, although in reality toll roads fall short of some sort of open market that Milton Friedman might have recognized. Elements of the modern internet system were more about the freewheeling culture of Silicon Valley than about government, although the defense establishment in the US did play a role early on. States can sometimes create markets where none previously existed, such as with auctions of radio frequencies, or types of intellectual property.

What all these points suggest is that investing in infrastructure isn't just about judging the bottom-up considerations around price-earnings' ratios, book values, profits, capital spending and depreciation. It also means that political risk has to be added to macroeconomic risks such as on interest rates. A complex subject for specialists, it is also arguably an example of where active asset management is important; this cannot be a "hands-off" asset class in all cases. (There are indices of infrastructure assets, and hence exchange-traded funds for those who want to just ride the wave without fuss.)

With all this, it looks as though the wealth management industry will be hearing a lot about infrastructure in coming months and years. And this applies to developing as well as developed countries. As India rises as an economic power, for example, so will its need for more infrastructure. The digitalization of its financial system – pushing out the use of cash – has been an example. China, as we have seen, has spent massively on infrastructure, although problems with property developments show that the iron rules of economics apply. Indonesia and Malaysia, with their youthful populations, are other cases of where much is happening and where there is still big potential. In time, depending on politics and governance, Africa is and ought to be an infrastructure boom story.

At times, in this age of social media and online technology, it is easy to lose sight of how it has been physical stuff that is important. That means infrastructure. BlackRock’s move has been one of many. Expect more to come.

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