Lazard Asset Management Executive Describes Evolution Of Private Infrastructure Investments, Growth Factors And Keys For Advisors To Know When Serving Clients
Like many spaces in wealth management, alternative investing evolved rapidly in recent years as the universe of available vehicles, strategies and underlying assets burgeoned. Private infrastructure investing is no exception. Yesterday’s investments still exist, but innovators have opened a multitude of other possibilities, responding to increased demand.
To understand the growing demand and changes occurring in private infrastructure, we spoke with Robert Wall, Managing Director and Head of Sustainable Private Infrastructure at Lazard Asset Management, which operates from 19 countries, managing $239.3 billion globally as of June 30, including listed infrastructure and sustainable private infrastructure.
Wall has more than two decades of experience in private market investment portfolios, infrastructure companies and delivering engineering projects, and has worked in infrastructure investments since 2007.
We asked him how infrastructure investments have evolved, the drivers behind the rising demand from high net worth clients and institutions, and what advisors should learn to bring infrastructure investments to clients.
WSR: How has the definition of infrastructure evolved throughout your career as an investor?
Some two decades ago, when infrastructure emerged as a distinct investable asset class, the companies that most obviously exhibited these characteristics were toll roads, regulated utilities and community assets built under public-private partnership (PPP) frameworks.
The subsequent growth in investors’ interest in infrastructure and the growing sophistication of infrastructure investment management resulted in two major developments. First, fund managers identified more companies that exhibit infrastructure characteristics – air and seaports, subsidized power plants, telecommunication towers and essential ferries became staples in infrastructure funds’ portfolios.
Wall: When people invest in infrastructure, they typically target companies that provide the assets and services essential to communities and the economy. Infrastructure companies exhibit strong barriers to entry (usually underpinned by real assets or legislation), and benefit from stable cash flows typically secured through long-term contracts or government subsidies.
Secondly, infrastructure strategies started differentiating on relative risk-return profile, offering investors greater choice similar to what was already common in real estate: supercore, core, core-plus, value-add and even opportunistic became distinct infrastructure investment styles.
Finally, the emergence of wind, solar and other forms of energy generation from renewable sources, together with improvements to the related infrastructure assets such as electricity grids, metering and storage has driven major new investment opportunities.
WSR: What’s driving the growing interest in private infrastructure investments from high net worth individuals and their advisors?
Wall: Private infrastructure is known for being complementary to investment portfolios by providing diversification and differentiated risk-return profile while having low, or even negative, correlation to traditional asset classes such as equities, and it tends to perform well through economic cycles and provide inflation protection.
In addition, unlike some other investment strategies, private infrastructure funds can offer target investment returns that consist of a mix of regular distribution yield and capital growth – which may appeal to individual investors who require regular withdrawals or dividends.
Finally, it has become evident in the past few years that some emerging business models and subsectors – especially within relatively recent trends of energy transition, circular economy and decarbonization of transport – have poor representation in listed markets. Private infrastructure funds could be a gateway for investors who want to gain exposure to, for example, the rise of biogas, rollout of EV charging networks or development of rooftop solar photovoltaics, but struggle to find suitable listed targets.
WSR: How can advisors who want to bring more infrastructure investments to their clients educate themselves, and what fundamentals must they master?
Wall: As with any financial advice, the key is to keep an investor’s individual requirements, circumstances and risk tolerance in mind. Remember that private infrastructure represents a long-term investment, and while some cash yield is expected, most of a client’s capital will be locked up for multiple years.
While illiquidity may be acceptable for large pension and sovereign wealth funds, it can be beyond an individual’s personal financial planning horizon. So attention should be given to ensuring liquidity is appropriately managed alongside an investment in infrastructure assets. Importantly, we expect to see more sophisticated liquidity solutions being made available for private wealth managers and their clients.
Another point worth mentioning is that infrastructure companies, by virtue of providing essential services to society (such as energy, transportation or healthcare), tend to have a particularly strong potential to improve environment and social outcomes. While positive ESG contribution is not a substitute for financial returns, it can be an additional benefit of infrastructure investment that is appealing to many individuals and may be harder to find in other sectors or asset classes.
Janeesa Hollingshead, Contributing Editor at Wealth Solutions Report, can be reached at email@example.com.