This is a sponsored article from UBS Asset Management.
Standfirst: We are in a golden age of an infrastructure build-out as mega-trends such as digitalisation, energy transitions and demographic changes play out. This disruption presents private wealth investors with a broad range of multi-year opportunities. Moreover, investing in private infrastructure can help fulfil sustainable and financial goals.
Market volatility has opened up entry point for infrastructure investments
High inflation and energy prices since early 2022 have hobbled capital markets. Since then, uncertainty and market volatility have been top of mind for investors.
Private market investments such as infrastructure can be a strong consideration for investors looking to strengthen and diversify portfolio returns. Furthermore, private infrastructure investments typically have longer investment horizons that make them more resilient to short-term price movements.
The current market volatility has opened up entry opportunities for investors. This is because traditional funding sources (banks or private markets) usually decrease when markets are challenging so infrastructure developers are turning to private markets for capital.
Multi-year opportunities as global mega-trends play out
“We are in a golden age of the infrastructure build-out. Our future is being shaped by mega-trends and a wide range of infrastructure investment is needed,” said Roland Hantke, Head of Multi-Managers Infrastructure at UBS Asset Management.
Trends like mobile connectivity, clean energy transitions and demographic changes may be well reported but the magnitude of infrastructure investment needed to move these along is much less appreciated. It is estimated that just for clean energy projects in 20231, capital of US$1.7 trillion is necessary.
Digital telecommunication and energy transition have been two sectors that have seen the strongest activity in recent years and continue to have significant capital needs and investment opportunities. For investors looking to combine sustainable goals with financial returns, investing in private infrastructure can be a tangible way to fulfil these aims.
There are two categories in this build-out. First, new or adapting infrastructure to enable these developments. The transition to clean energy is one example. With electric cars, cities will need to adapt existing parking facilities for EV charging stations. As we pivot towards solar or wind energy, energy storage facilities will also have to be constructed.
Next, upgrading or replacing aged infrastructure such as roads, bridges, airports, and water systems. These are needed to ensure safety and enhance efficiency and connectivity.
These needs are recognised by governments that have created stimulus plans to significantly incentivise such investments. The US$369 billion Inflation Reduction Act in the US is a good case in point. “But there’s still a large funding gap and this is good news for private markets investors. Private capital can find innovative financing solutions for this challenge and also be part of the collaboration with the public sector.”
“The opportunity in infrastructure investments, its long-duration and diverse investment themes, are we think, a durable alpha source,” said Hantke.
Institutional-grade infrastructure portfolio in accessible semi-liquid structure
Hantke admitted that the barrier to investing in direct, private infrastructure can be high, especially for individuals. “You need a professional team with specialised knowledge to identify and assess opportunities. The initial capital investment is significant, and your liquidity will be locked up. That is why private infrastructure investing has traditionally been for institutional investors only.”
However, that investor makeup is changing. Regulations now allow for a broader range of investors to own private assets through semi-liquid fund structures and with considerably lower initial capital outlay.
The infrastructure team at UBS Asset Management has developed a semi-liquid multi-manager infrastructure strategy in a fully regulated fund wrapper with the highest investor protection standards (a Luxembourg-domiciled UCI Part II2 fund structure) that allows private wealth investors to be part of the growth in this sector.
“While this may be targeted at individuals, the underlying investments here are institutional-grade. Individual investors benefit from the same manager selection and portfolio construction process as our institutional mandates,” he emphasised.
The UBS Asset Management multi-manager infrastructure team will invest this strategy globally and diversify across major sectors – energy transition, communication, transportation and social infrastructure – to tap into the mega-trends.
Infrastructure projects can be long-dated. In the early years, returns can be low as projects are not cashflow positive yet. The strategy will focus on operating infrastructure assets, and be invested across investment types – co-investments, primaries and secondaries – to mitigate some of this “J-curve” effect.
Hantke explained that the secondaries market allows the team to pick and choose funds with a range of maturity profiles. With co-investments, the firm can join forces with leading infrastructure fund managers for hard-to-access sectors.
“Track record matters. You’d want to put money with a team that has been round the block a few times. It helps with identifying high-quality assets and assessing risks related to construction and regulatory ones,” said Hantke.
The infrastructure team head has been investing in the asset class for 20 years and has led the team since its inception. The team has made over 130 fund investments in primaries, secondaries and co-investment funds.
Time in the market has also earned the team long-standing relationships with top infrastructure managers and their investors have benefitted from exclusive access to leading managers that are often oversubscribed.
“Our size and reputation in the market have won us seats on investor advisory boards of the infrastructure funds we invest in. This way, we can influence fund documentation and negotiate fee reductions and other contractual benefits for our clients,” added Hantke.
Allocation to private infrastructure is expected to remain strong. A survey of institutional investors indicated that over 90%3 are looking to maintain or increase their capital to the asset class.
For private wealth individuals, the UCI Part II fund structure is a stepping stone to access a slice of the infrastructure pie.
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1 Source: International Energy Agency, World Energy Investment 2023
2 Undertakings for Collective Investment (UCIs) are investment funds. They include those subject to Part II of the Law of 17 December 2010 relating to undertakings for collective investment.
3 Source: Preqin Global Report 2023: Infrastructure
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This is a sponsored article from UBS Asset Management.