RE V Infra: A turf war’s first skirmishes?

Infrastructure is the new real estate. In an interview for the October 2011 issue of PERE’s sister publication Infrastructure Investor, Mark Weisdorf – head of JPMorgan Asset Management’s Infrastructure Investments Group – says he thinks that, in the US and Europe, infrastructure may become as big a part of institutional portfolios as real estate within the next 10 to 15 years.

There is a precedent in Canada and Australia, where many institutional portfolios already boast a more than healthy slice of infrastructure. This is well known to Weisdorf, the man who first shaped the private markets investment strategy at the Canada Pension Plan Investment Board. But in the US and Europe, where institutions are only just latching on to the merits of the asset class, allocations tend to be measly at this point. 

So what gives Weisdorf such confidence in infrastructure’s prospects? Among other reasons, he believes institutions are beginning to appreciate that infrastructure can be the ‘Holy Grail’ asset class because of its low correlation to both equities and fixed income. In theory, it’s the asset class that institutions have been looking for but didn’t know existed – until now. And the implications of that could be game-changing.        

….institutions are beginning to appreciate that infrastructure can be the ‘Holy Grail’ asset class because of its low correlation to both equities and fixed income.

But if this suggests the prospect of an annexation of real estate territory by infrastructure, there have been reminders recently that borders can be crossed from either side. This week, London-based real estate manager Palmer Capital launched a new fund to acquire UK solar parks. Because of the apparent similarities between real estate leases and feed-in tariff mechanisms, the firm has identified renewable energy infrastructure as an investment space it feels comfortable with.

Talking to Infrastructure Investor, Palmer Capital chief executive Alex Price said: “Real estate investors will move into renewable energy [infrastructure], although I’m not sure whether they will go much beyond that initially.” Sharp-eyed observers may already have noted the key word: ‘initially’. In the same conversation, Price confessed that he didn’t see a whole lot of difference between the investment characteristics of a toll road and those of a shopping centre.  

For evidence that real estate managers might spread their wings to encompass other parts of the infrastructure spectrum, look no further than the consortium of investors led by Commerz Real – the real estate arm of Commerzbank – which acquired German transmission operator Amprion two weeks ago. The actions of the German electricity regulator in proposing reduced equity returns just a day after the deal closed may serve as a warning for real estate funds thinking infrastructure is an easy cross-over, but the more significant take-away may still be that Commerz Real did the deal in the first place.

Where real estate does migrate to infrastructure’s playing field, what are limited partner investors to make of it? One consideration is whether the characteristics of the investment space in question really are suited to real estate managers, or if the similarities are being exaggerated. If the LP determines that the real estate fund really is at home in the investment space, then infrastructure fund managers may find themselves with some very tough competition. Real estate fund managers, after all, tend to have longer track records. And long track records count for a lot in LPs’ eyes – especially in these uncertain times. 

Infrastructure may indeed be the new real estate. But who should celebrate this most – infrastructure fund managers or real estate fund managers? That remains to be seen.

*For the full-length keynote interview with Mark Weisdorf, make sure you check out the October 2011 issue of Infrastructure Investor.