Value beyond the hype in US infrastructure

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Following the election of Donald Trump, global infrastructure investors turned their attention to the US in expectation of a transformative plan for infrastructure investment, which is yet to materialise.

The past 10 to 15 years in the US infrastructure market have been disappointing despite the scale of the market and its well-recognised need for investment. Given the current model of using municipal or state funding for most infrastructure, the opportunities available to institutional investors have been limited and the market has remained stagnant. Therefore, it isn’t a surprise that one of Donald Trump’s proposed changes – the business-friendly infrastructure projects fuelling the equity rally – haven’t yet come to fruition. In fact, it feels familiar: Barack Obama also came to office with an infrastructure expansion plan, and it was swiftly sidelined.

Nevertheless, it feels like US infrastructure’s moment has arrived. Trump’s appointment came quite late into our own US infrastructure ambitions. AMP Capital has a strong infrastructure presence in the UK, Europe, and Australasia (in countries that largely have a successful tradition of public investment in infrastructure). We felt that the US was the last bastion for us. Our recent acquisition of ITS ConGlobal, the railroad services and logistics provider, is a product of our decision to buy and actively manage mid-market infrastructure assets in the US. We seek resilient assets that can be bought and managed regardless of the political climate.

Structural change in US infrastructure

Whatever happens on the policy front, there is a gradual structural change underway. US infrastructure is severely underinvested and many assets are in noticeably poor condition. The G20’s Global Infrastructure Hub forecasts that $12 trillion needs to be invested in US infrastructure by 2040 and there is currently an estimated $3.8 trillion ‘funding gap’ for the maintenance and development required. Institutional investors are likely to be a source of this required capital.

While federal policy is tricky to predict, we have more confidence in the macroeconomic picture. We are bullish on US GDP over the next five to seven years, and a great way for allocators to gain exposure to this trend is to invest in infrastructure assets with a strong correlation to US GDP. From a portfolio construction perspective, we have been looking to add US GDP exposure.

Avoid core, but embrace core-plus

Given the investor focus on the US infrastructure market and the lack of opportunities available, the market is competitive. So-called ‘core’ infrastructure assets are the traditional investment route: tollways, roads, gas utilities, ports. Large public assets traded mostly between asset owners such as pension funds and sovereign wealth funds, coveted for their predictable earnings over decade-long periods, are rare and highly competitive. This is especially so in the US due to its less-established public private partnerships model. Aside from buying well, there’s usually not a great deal an owner can do to improve the modest inflation-linked investment returns. They can be worth their high valuations for certain institutional investors seeking liability-matching returns.

Avoiding the high competition for core assets and their restricted return profile, we prefer assets that meet our definition of ‘core plus’ infrastructure. They have many of the same attributes as core infrastructure – high barriers to entry and a stable cash flow profile, within the sector of essential services – but they are not actually a core asset such as a port or railroad. ITS ConGlobal is an example. It’s a service-based business that handles container lifting between various modes of transport like rail, truck, and ship. It is outside the definition of core infrastructure, but shares many of its advantages.

While we are cautiously optimistic about the opportunities in US infrastructure, discipline is essential. We identified the investment opportunity in ITS ConGlobal more than two years before we acquired it last month. We expect to add exposure to US GDP given our read of future economic trends, with more value in the mid-markets than in higher profile assets.

 

Dylan Foo is Head of Americas, Infrastructure Equity at AMP Capital, a sponsor of Cuffelinks. This article is general information and does not consider the circumstances of any investor.

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