The Bain research categorizes private infrastructure investment into two groups: Core infrastructure sectors like electric utilities, oil & gas, and transport, which will grow at an average three percent per year through 2017, and Social infrastructure such as water, healthcare, and education which will grow at an annual average of four percent over the same period. As private investors look to infrastructure as an asset class, however, two core challenges have emerged. First, regulatory and economic instability within individual markets can act as a deterrent, especially to investors with less infrastructure expertise. Second, lower costs of raising capital and fewer good targets for investments has led to increased competition and rising asset prices.
“Infrastructure has looked very attractive in a world starved for yield,” said Nacho Rios, a partner in Bain’s Madrid office and lead author of the research. “But the mechanics of risk and asset pricing are shifting. We’re seeing a much greater need for specialization as each country and sector’s needs create unexpected challenges for the uninitiated.”
The Bain research focuses on three key infrastructure areas, power & gas utilities, oil & gas, and transportation, which have accounted for 75 percent of private infrastructure investment in the past five years, and which will continue to dominate future demand scenarios:
In total, the study finds, infrastructure attractiveness will affect the mix of asset allocations significantly. Currently, the majority (roughly 75 percent) of institutional investors allocate less than five percent of assets under management (AUM) to infrastructure. But target allocations are quickly shifting. Bain expects the majority of investors to allocate five percent or more of AUM to infrastructure in the coming years. Furthermore, the total number of infrastructure funds has already almost tripled in five years. This surge in supply and demand around this asset class creates six new criteria for infrastructure investing in the coming decade.
“These ‘new era’ criteria will widen the gaps between infrastructure funds that excel in delivering returns and those that are tripped up by the risks,” concluded Rios. “This means that as more capital seeks out infrastructure targets, we’ll also see a flight to quality to those funds that widen the gap successfully.”
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