Executive summary
Using a large dataset of more than 1,000 transactions, we have derived a time series of private infrastructure valuations. This allows us to make direct comparisons with valuations in listed equity markets.
By adjusting the series for maintenance capital expenditure (capex), we have also created an “infrastructure cap rate”, enabling investors (for the first time as far as we know) to directly compare infrastructure valuations to those of real estate.
Unlisted infrastructure multiples did expand in the period of low interest rates following the global financial crisis (GFC). But infrastructure did not benefit materially more than other equity. Like for the S&P 500® index, the MSCI World index and other equity in general, the increase in the multiple was accretive to returns over this period, but it was earnings growth that accounted for the bulk of performance.
Infrastructure valuation multiples have a negative relationship with interest rates and a positive relationship with inflation. Since higher inflation is often followed by an increase in interest rates, there is often an offsetting impact from these two forces on infrastructure valuation multiples.
Many infrastructure investors are concerned that perceived high levels of dry powder have placed upward pressure on valuations in recent years. However, our analysis has not found statistically significant evidence that dry powder had an impact on valuations. Interestingly, it also has not been particularly high, growing only in line with expanding market opportunities.
Based on our findings in this paper, if the world returns to a “low inflation, low interest rates” environment, this could imply attractive entry opportunities for acquiring infrastructure assets in 2H23 and a quick bounce back in valuations in 2024. If inflation subsides but interest rates remain at a structurally higher level compared to the previous decade, there would be stronger downward pressure on valuations over the coming years.
To safeguard returns and valuations against the downward pressure from higher interest rates, greater focus on earnings growth will be required in the years ahead. Driving revenue growth, optimising costs, a prudent approach to leverage, careful management of regulatory risks and stakeholders, and the skills and expertise to unlock opportunities created by the energy transition will all be crucial to return delivery.
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The views expressed represent the investment team’s assessment as of the date indicated and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.
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[3800134] 9/2024
