The Chicago Skyway is an unlikely candidate for acquisition. It is, after all, a bridge, a 7.8-mile elevated toll road that crosses the Calumet River on its way into Indiana. And any bridge for sale—be it located in Brooklyn, Chicago or elsewhere—is usually greeted with laughs of derision rather than serious indications of interest. Yet last year, in what was widely regarded as a watershed deal for infrastructure investments in the US, the Skyway was acquired by two foreign investors, the Spanish firm Cintra and the Australian bank, Macquarie, for $1.8 billion (€1.4 billion).
In relatively short order, investments in infrastructure— bridges, toll roads, airports, railways, utilities and so on—have become the darlings of the alternative asset community. In recent months, both Goldman Sachs and The Carlyle Group have formed infrastructure groups with ambitions to raise billion-dollar-plus vehicles. JP Morgan has followed suit. And in May, Macquarie, the leader in the field, held a first close on its second European infrastructure vehicle, which is expected to raise approximately €2 billion.
The rationale for all this excitement, particularly among institutional investors, is relatively straightforward. The long-term nature of infrastructure matches up well with the long-dated liabilities of most pension funds. Returns in the sector, which range from the high single-digits to the low teens, have become more and more appealing as returns are compressed in other alternative asset classes. And as governments around the world look for new sources of capital, the trend towards privatization of public infrastructure projects is expected to accelerate.
What is not straightforward, however, is the rationale for lumping infrastructure and real estate together. At two recent property-related conferences in Europe, infrastructure was one of the hot topics. At the IPD event in Lisbon, for example, Dr. David Geltner, a respected academic from MIT, suggested that expanding the definition of real estate to include infrastructure would enable investors to generate the types of strong risk-adjusted returns no longer available in traditional property sectors.
While disagreeing with an MIT professor is not always the smartest course of action, some investors are grappling with Geltner's expansive definition.
“Infrastructure is a very, very interesting question for us,” notes the head of real estate at one university endowment. “We keep hearing and seeing infrastructure raised in terms of real estate, but the conversation we're starting to have internally is: ‘is it really real estate?’”
In some respects, the answer is yes: infrastructure investments are predicated on location, so knowledge of local economies, regulatory environments and growth trends is vital. As the institutional investor notes, however, real estate is only part of the picture; the asset class also has shades of commodities, private equity, fixed-income and even emerging markets.
“If someone is selling an energy plant in Brazil, I have a hard time thinking that's real estate,” he adds. “Yes, the plant rests on land, but it's much more of an operating business; it's also fixed-income if you believe in the nature of utility cash flows. Throw in Brazil and it becomes emerging markets very quickly.”
Infrastructure, for all intents and purposes, seems to be an independent asset class, much like private equity, real estate or even timber. A limited partner with a real estate background can certainly provide valuable insight on an infrastructure project, but to truly underwrite an investment or fund manager requires a broad and distinct set of disciplines. Perhaps because of its nascent development, infrastructure has temporarily found a home within real estate. But fund managers and institutional investors should hope that is only temporary. Partnerships, especially those that involve billions of dollars, work best when both parties fully understand the risks and opportunities inherent in the underlying investment strategy. For the asset class to fully develop, it needs the institutional investor community to groom and develop portfolio mangers dedicated to infrastructure, not real estate experts forced to wear an infrastructure hat.
“We keep hearing and seeing infrastructure raised in terms of real estate, but is it really real estate?”
Knowledge of real estate may provide a bridge to the world of infrastructure. But real estate LPs should be wary of buying any bridge that is for sale.