Infrastructure Investing Q&A with Mercer

As a leading investment firm, Mercer has a deep understanding of all asset classes, both public and private. Through an alliance with Nasdaq, Mercer research is available to subscribers through the eVestment platform to help asset owners make better decisions for their portfolios*.

We recently sat down for a Q&A with Julia Schiffer to get her insights on inflation-resistant assets and why investors should be considering infrastructure investments today.

Julia is a Partner & Senior Portfolio Manager of Infrastructure Investments at Mercer Alternatives, the global specialist investment arm of Mercer, which provides advisory services, customized and pooled investment solutions for institutional investors around the world.

Why inflation-resistant assets now and why infrastructure? (i.e. why should asset owners be investing in this asset class/strategy)

The infrastructure asset class demonstrated strong performance and downside protection during last year’s market volatility, highlighting its essential nature and historically strong downside protection. Inflation concerns have further increased its appeal, as infrastructure assets often benefit from long-term, inflation-indexed contracts or the ability to pass on higher operating costs.

The growing need for modern and sustainable infrastructure, coupled with challenges like climate change and the energy transition, presents potentially appealing investment opportunities that outpace current capital flows into the asset class. Additionally, infrastructure secondaries and co-investments may offer attractive opportunities for investors.

Could you talk about the risk/return profile of infrastructure funds and what other assets an investor might compare it to in their portfolio?

Given the nature of the underlying projects and companies, infrastructure funds generally offer a comparatively lower risk profile than private equity or venture capital, and may provide relatively stable, predictable cash flows over a long-term investment horizon. Some investors liken infrastructure to private debt & fixed income given the return target of core/core+ funds and the income generated. However, apart from the fact that debt is of course more senior in the capital structure, this ignores that infrastructure equity funds i) typically buy ownership stakes in an infrastructure project/company ii) cover strategies targeting a range of returns and iii) have different return drivers including operational efficiency, platform expansions and market growth. 

Within their real assets portfolios, we’ve seen many asset owners curtail their new allocations to oil & gas strategies in favor of infrastructure strategies. Are you seeing the same and what is the rationale there?

The main concern with oil and gas investments is the risk of stranded assets as the world moves towards a low-carbon future, potentially leading to lower returns. There is also terminal value uncertainty given that the universe of potential future buyers might decrease in light of ESG concerns. Coupled with market volatility, this has led many investors to recognize the importance of diversification, including within infrastructure. Whilst traditional energy has historically dominated global infrastructure transaction volumes, renewable energy, and more recently communication, have taken a larger and larger share. To build a robust portfolio, it is advisable to invest across many different sectors and subsectors.

Now in terms of more liquid strategies, are you seeing any infrastructure funds with unique strategies or structures? (i.e. trend of infra funds that are more credit-like and paying out dividends early?)

As with any other asset class that matures, specialist strategies and niche opportunities are emerging, that either seek to capitalize on a specific, less efficient market or to create a product that is expected to resonate particularly well with potential investors and stand out from the crowd. A growing number of open-end funds aim to make the illiquid asset class more liquid, mainly investing in core/core-plus space and seeking to pay dividends early with an element of value-creation attached. Infrastructure equity should not be confused with credit.

Interest in “green” or sustainable strategies continues to gain momentum with investors. What kinds of strategies are you seeing in the infrastructure space that have an ESG focus?

The infrastructure sector offers many attractive opportunities with strong ESG characteristics, from mainstream strategies where the ESG footprint is managed particularly well, to investments that seek to create a non-financial impact alongside a financial return. Opportunities cover various sectors such as healthcare, education, water conservation, the whole value chain of renewable power generation and energy transition – such as grids and batteries, digital infrastructure, and public transport electrification. Infrastructure is well developed in terms of ESG and often outperforms other private market asset classes in this regard.

 

Want more insights on investing in infrastructure and other inflation-sensitive assets?

Read the CIO Quarterly edition on the topic.

 

*Mercer research does not guarantee that target returns will be met. Investing in infrastructure products involves risk, including possible loss of principal as the value of investments fluctuates.

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