The market’s appetite for private market investments keeps growing, with roughly one in two investors saying they plan to boost their exposure to private infrastructure this year, according to recent surveys. Interest in infrastructure, which has historically been a relatively stable source of income, isn’t likely to fade anytime soon, especially with recent volatility in equities, fixed income and other areas of the market.
The question is no longer whether advisors will embrace this asset class, but rather how they are likely to add to this exposure—through privately held infrastructure assets or publicly traded companies whose assets or services support government-run infrastructure. Public and private infrastructure investments are often lumped together, but they can behave differently and appeal to different investors.
For instance, as exposure to public infrastructure is gained through owning shares of publicly listed securities, these investments are likely to be subject to much of the same volatility as the broad equity market and thus can exhibit higher correlations to public stocks and provide lower diversification benefits.
In contrast, private infrastructure, which includes assets ranging from transportation networks to communications systems to renewable energy projects, represents more of “pure play” exposure to the asset class, with returns more closely tied to the actual function and cash generation of the underlying projects. Private infrastructure also tends to exhibit lower volatility than public infrastructure owing to its pricing mechanism, which has historically smoothed out observed returns.
Comparing Historical Performance
Over the past two decades, private infrastructure has suffered losses in only one calendar year. That was in 2008, during the global financial crisis. Public infrastructure, by contrast, has historically followed a slightly choppier path, suffering losses in five of the past 20 years: 2008, 2015, 2018, 2020 and 2022, according to Cambridge Associates. And in 2008, when both asset classes lost ground, private infrastructure suffered less than half the losses of their publicly traded counterparts.
The result: While public and private infrastructure have generally followed similar return patterns, private has outperformed public over both the past 10- and 20-year time periods. Over the past two decades, for instance, the Cambridge Associates Global Infrastructure Composite, which serves as a proxy for private infrastructure, has generated a 9.8% net annualized return. Compare that to the 8.8% net annualized return for public infrastructure, as measured by the Dow Jones Brookfield Global Infrastructure Index. The discrepancy between the two asset classes was larger over the past 10 years, with privates producing a 9.7% net annualized return compared with 3.6% for public.
The Value of Public Infrastructure Investments
Public infrastructure provides easy access and daily liquidity, which is beneficial for investors with significant liquidity constraints. And public infrastructure typically requires less resources and capital than investing in private infrastructure.
Constructing and maintaining a private infrastructure portfolio typically requires significant and dedicated research resources for due diligence and monitoring. The minimum commitment size for some private infrastructure investment vehicles, typically $1 million to $10 million, can also limit the flexibility for some investors to build a diversified portfolio using only private markets. Public infrastructure does not have (or has a much lower) minimum commitment size, which enables smaller portfolios to participate in infrastructure whereas they may not be able to with private funds.
However, advisors can help clients minimize or even eliminate the high investment minimum requirements associated with investing in private infrastructure by investing through certain investment structures, such as an interval fund, which may have low (such as $5,000) or no minimums. And investing in private infrastructure using an interval fund structure can offer the investor a greater degree of liquidity, such as quarterly redemptions, with some restrictions.
Making the Case for Private Infrastructure
Higher potential performance, low-correlation to public markets, increased diversification and reduced volatility are the primary benefits of an allocation to private infrastructure. The private asset class tends to represent a more direct means to achieve the desired characteristics that infrastructure offers, such as downside and inflation protection, compared to its public market counterparts. The investment performance of a private infrastructure asset is determined largely by its operational performance (e.g., the ability to produce a consistent level of cash flow). Like other private market assets, its valuation is not likely to be whipsawed with changes that occur in the equity markets. By contrast, the performance of public infrastructure stocks may be heavily influenced by the overall market environment, trends and investor sentiment.
Like other private market asset classes, private infrastructure is not priced on a daily basis and therefore tends to exhibit lower observed volatility than public infrastructure. Private infrastructure is valued quarterly, and the managers who own the assets often have wide latitude in applying valuation methodologies (that arguably represent a more rational valuation process). Moreover, price changes tend to be reflected on a lagged basis in reporting, perhaps taking even two quarters to reflect equivalent changes in public securities. The result is a “smoothing” of the returns experienced by private infrastructure investors. The smoothed nature of private infrastructure’s returns may also contribute to its lower observed correlation to traditional stocks and bonds, compared to public infrastructure.
Finding the Right Fit
Ultimately, the right approach depends on your clients. For advisors serving high-net-worth clients, private infrastructure is increasingly becoming part of the strategic conversation, not just as a diversifier but a stable, long-term core holding that can provide relatively stable income along with a built-in hedge against inflation and economic cyclicality.
Whether it’s utilized immediately or after initially gaining exposure through public infrastructure will depend on several factors, including the size of your clients’ portfolios, their liquidity needs, risk tolerance and appetite for complexity. It will also depend on your ability to educate your clients on the nuances of this asset class and the role that private infrastructure can play in creating a broadly diverse, long-term investment strategy.
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