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REAL ESTATE SERVICES

GLOBAL INFRASTRUCTURE: PRIVATE MARKET TRENDS SUGGEST A LISTED MARKET OPPORTUNITY

Daniel Foley

Senior Vice President, Associate Portfolio Manager, Infrastructure

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In our view, the transactions in the private infrastructure marketplace continue to highlight the opportunity to own core infrastructure assets in the listed market at a significant 20%+ discount to their underlying asset value. This valuation gap is unlikely to persist indefinitely, which makes a compelling case for allocating to Global Listed Infrastructure.
The private market continues to see significant capital flows making it the largest marginal buyer of assets. The combination of the growing demand for infrastructure and the mismatch between the supply of assets and capital seeking to invest is likely to remain supportive of private market valuation levels, while highlighting the valuation discount of the listed market. Our investment approach incorporates this private market perspective which informs our constructive views of listed company valuations and total return potential.
AWASH WITH CAPITAL – PRIVATE INFRASTRUCTURE’S HIGH-CLASS PROBLEM

The growth in demand for infrastructure as an asset class has led to significant fundraising in the private market as fund managers seize the opportunity to raise capital. Over the past five-and- half years ending June 2018, unlisted infrastructure funds have raised $317 billion¹ of capital from institutional investors. Of the $317bn raised, there remains $177bn of uninvested dry powder². In addition, there are currently 180 funds that have announced the intention of raising an additional $127 billion of fresh capital¹, including two megafunds, each targeting a capital raise of $20 billion³. If we assume 50% leverage, this implies a total of $600 billion of private market buying power seeking exposure to infrastructure assets (Exhibit 1).

EXHIBIT 1: INFRASTRUCTURE PRIVATE MARKET BUYING POWER

¹Preqin Quarterly Update: Infrastructure: Q2 2018.
²PreqinPro as of September 2018.
³Peter Smith and Judith Evans. “Infrastructure funds make bold bet as investor demand runs on.” Financial Times, 23 Sept. 2018.

Growing demand from the private market supports asset values while highlighting the discount that exists in the listed markets.

DEMAND FOR INFRASTRUCTURE IS INCREASING

Some of the largest pension funds in the world have been leading the charge for the asset class, and we would expect other institutions and retail investors to follow their lead. A recent survey conducted by Preqin4 found that 55% of institutional investors planned on increasing allocations to infrastructure over the longer term – more than any of the other asset classes.

For example, the Canadian Pension Plan Investment Board (CPPIB), an institutional investor representing C$356.3 in net investments5, has been one of those early trailblazers. Their allocation to infrastructure has grown from 0.2% in 2005 to 8.0% in 2018 (Exhibit 2). In actual capital invested terms, CPPIB’s allocation to infrastructure of ~C$200m in 2005 has grown to a C$28.6bn investment today and marks a substantial increase in capital deployed.

While demand for and allocations to infrastructure are increasing, a challenge has emerged for private market investors. The high level of dry powder illustrates the difficulty fund managers are having finding attractive investment opportunities given the scarcity of assets and increased competition in the private market. For  investors looking for exposure to essential infrastructure assets, we believe the listed market provides ample liquidity while standing to benefit from investment characteristics that of a private market investment.

EXHIBIT 2: CPPIB INFRASTRUCTURE ALLOCATION

Source: Canadian Pension Plan Investment Board (CPPIB).

Sophisticated institutions are increasing allocations to infrastructure, a trend we expect to continue.
Investors allocating to listed infrastructure have the opportunity to gain exposure to the asset class at a 24% discount to private market valuations.
INFRASTRUCTURE IS CHEAP IN THE LISTED MARKET

Over the last three years, we tracked more than 70 deals where private market participants acquired core infrastructure assets. The deals represented more than $75bn in aggregate deal size. We find the average EV/EBITDA multiple paid by private buyers has been 15.3x. By comparison, the listed infrastructure market traded at an average 11.6x multiple over the same time. The difference is a significant 24% discount to the private market (Exhibit 3). It is our view that the large and growing pools of private infrastructure capital will continue validating the inherent value of the listed infrastructure space through ongoing transaction activity.

4Preqin Investor Interviews, December 2017.

5CPPIB FY2018 Annual Report. Excludes non-investment assets such as premises and equipment and non-investment liabilities, totaling $(0.2) billion for fiscal 2018.

EXHIBIT 3: INFRASTRUCTURE LISTED AND PRIVATE MULPTIPLES

Source: CBRE Clarion Securities

CLOSING THE VALUATION GAP
LISTED INFRASTRUCTURE MULTIPLES MAY RERATE HIGHER

The continuation of private market deals will ultimately shine a light on the undervalued nature of the listed infrastructure companies and may push listed market valuations higher. We believe ongoing transaction activity will eventually wake up public equity investors to the fact that they’ve been using the wrong valuation framework. In this way, we suspect that equity multiples will continue to rerate higher for listed infrastructure stocks and begin closing the gap versus private market valuations.

LISTED INFRASTRUCTURE ASSETS IN THE CROSSHAIRS

Another avenue for closing the valuation gap exists. We have evidence that private investors already recognize the value gap between private and listed markets. In summer 2017, IFM, one of the largest private infrastructure investors globally, took private a listed Mexican toll road operator OHL Mexico. IFM’s bid of $27 a share represented an 18% premium to OHL’s then stock price but a much more significant 30% premium to the unaffected price in March before IFM’s involvement in a potential delisting was first rumored in the press. Some private fund managers have even taken non-controlling stakes in listed infrastructure companies which acknowledges the ability to gain access to the same assets desired by their clients in scale and at a discount. If we continue to play this forward, another resolution to the growing valuation gap is an increasing wave of privatizations at significant premiums to listed valuations which will continue to accrue value to listed infrastructure investors.

THE POTENTIAL OPPORTUNITY FOR LISTED INFRASTRUCTURE INVESTORS

We believe there is a path towards unlocking value in the listed infrastructure market that supports our view of 10%+ return expectations for the asset class. The ongoing wave of capital into the private infrastructure market is likely to continue supporting valuation levels. The scarcity of assets and infrastructure’s high barriers to entry may delay the deployment of capital through the private market. Our analysis of private and listed infrastructure market multiples reflects a potential opportunity; investors can allocate to the listed infrastructure market at 20%+ discount to private market valuations. At the same time, listed investors get to enjoy the benefits of liquidity and diversification, which is likely to remain a challenge in the highly competitive private market.

The combination of the growing demand for infrastructure and the mismatch between the supply of assets and capital seeking to invest are having a very real effect on private market asset valuations. We believe these trends will continue to highlight the relative cheapness of infrastructure assets in the listed markets. The valuation-gap that has emerged is likely to close over time making the investment opportunity for listed infrastructure even more attractive. Our investment approach incorporates this private market perspective which informs our views of listed company valuations and total return potential.