Global infrastructure set for rerating as private equity dives in

The gap in valuation between public and private infrastructure is narrowing, CBRE Clarion says. Photo: Phil Weymouth CBRE Clarion’s Jeremy Anagnos with UBS Asset Management chief Bryce Doherty. Photo: Christopher Pearce
Nanjing Night Net

Shares in listed infrastructure groups are more likely to be boosted by private equity firms buying their shares in lieu of opportunities in the unlisted space, rather than the promise of fiscal stimulus, CBRE Clarion’s head of infrastructure says.

Australia’s relatively small infrastructure space includes some of the most expensive stocks on the S&P/ASX 200 Index, including Transurban and Sydney Airport. But the picture is much friendlier elsewhere, and public companies are trading at a discount to their private counterpart, chief investment officer of infrastructure at CBRE Clarion Securities Jeremy Anagnos said.

The sector has been a haven for pension and sovereign funds that have been driven out of bonds as yields, until recently, have tumbled to multi-year lows.

But while valuations of local stocks have soared due to the relatively small pool, outside of Australia, most of the capital from these funds have been into buying physical assets as opposed to shares, US-based Mr Anagnos said.

“The same phenomenon hasn’t played into the listed market,” he said.

“Our analysis says that on the average the pricing we’re seeing for assets transacting in the private markets implies that the assets held by the public companies are at a discount of around 15 to 20 per cent,” he said. ‘Dry powder’

Yet listed companies could be set to a rerating, due to a scarcity of private assets and there is plenty of cash to deploy. At the end of the third quarter, private capital sitting as “dry powder” globally topped $US136 billion ($178 billion), and that scarcity is driving them into buying shares, Mr Anagnos said.

“In the last six to 12 months there has been an increasing overlap or intersection of private infrastructure funds and large sovereign fund investments buying straight into public companies,” he said.

Global Infrastructure Partners, one of the largest private equity firms in the space sitting on as much as $US16 billion, last month bought a €3.8 billion ($5.4 billion), 20 per cent stake in publicly listed Spanish company Gas Natural. Last year, IFM took a 25 per cent stake in a Mexican toll road owned by OHL Mexico.

“This is a trend that will highlight the market and the more that capital starts to overlap, the more that [valuation] disconnect will start to narrow.”

The UBS Clarion Global Infrastructure Securities Fund holds 4 per cent of its total holdings in Transurban, with a 7 per cent invested in Australia. Almost half the fund is tied up in US shares. Among its top holdings it includes US-based Crown Castle International, Kinder Morgan, Sempra Energy and Canadian firm Enbridge. Reform cheer

Private equity will be cheered by the prospect of fiscal reform that has sprung up from the perceived limits of central bank policy and mooted by the likes of new British Prime Minister Theresa May and Japanese Prime Minister Shinzo Abe.

But more critical to the prosperity of the sector is the need for significant capital to be invested in ageing infrastructure assets and also a shift towards cleaner energy.

“It is far easier to get approvals from regulators to spend the capital [on refurbishment] because of the need for these assets not to cause harm,” Mr Anagnos said.

“The governments have been understanding of the need for new infrastructure and investment. But governments are not always able to follow through on what they talk about.”

Fiscal spending would be the “gravy” which will add to the investment case for infrastructure, but the time frame is more uncertain.

“It will bring awareness to the asset class more broadly and good for our economic environment, but it would be a plus to the investment case rather than what we build the investment case on.”

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