Institutional Investors and Infrastructure Investing
By Alexander Carlo
In their recent study, Andonov et al. (2021) document that institutional investors have significantly increased their allocation to infrastructure investments over the past decade. More specifically, infrastructure funds have increased their AUM from $59 billion in 2008 to $486 billion in 2019, a 723% increase! The figure below shows that the three most common reasons why institutional investors incorporate infrastructure in their portfolios are the desire for long-term reliable income streams, low correlation to other assets, and inflation hedging.
However, even though investors expect infrastructure to deliver long-term stable returns, this study finds that institutional investors mostly gain exposure to infrastructure through finite-horizon private funds. Additionally, the authors find that the business model of closed funds does not translate the differences in the underlying assets into different cash flow properties compared to other private funds.
The figure below compares the cash flows of infrastructure with the cash flows delivered by buyout, VC, and real estate funds. From Panel A and C, it becomes apparent that the dollar amounts of capital calls and distributions over time provided by infrastructure are similar to the dollar amounts of capital calls and distribution delivered by buyout and real estate funds. More specifically, their distributions are not more stable (flatter) over time and do not last for a longer time period. This would go against the main reasons stated by institutional investors, for investing in infrastructure funds as displayed in the first figure.
Thus, even in cases where the underlying infrastructure assets are more tangible, belong to highly regulated industries, and in some cases are even backed by long concession agreements, the business model of closed funds does not translate these characteristics in terms of cashflow calls and distributions. Going forward, future research should examine whether alternative investment structures could assist in meeting investors’ expectations. This will be important if institutional investment is to continue to flow towards infrastructure.
Andonov, Aleksandar and Kraeussl, Roman and Rauh, Joshua D., Institutional Investors and Infrastructure Investing (March 2021). Stanford University Graduate School of Business Research Paper No. 18-42, Available at SSRN: https://ssrn.com/abstract=3245...