From real estate to real assets
By Scott Carpenter, Global Head of Private Equity & Real Assets Fund Services, State Street’s Alternative Investment Services Group
Published: 13 July 2018
As the alternative investment industry environment transforms faster than ever before, alternative asset managers’ ability to adapt their business models is being tested to the extreme. Driven by the need for better long-term returns and portfolio diversification, institutions have increased their allocations to alternative assets over the last two decades. Managers working to deliver a differentiated offering as the appetite for alternative strategies grows are finding that real assets are turning into a real opportunity.
Adding Infrastructure to the Mix
Real assets are a combination of all types of physical assets held by funds, including real estate and infrastructure. It’s this mix of investments that’s playing an increasingly important role in our clients’ portfolios. The unique characteristics of infrastructure investments – being stable through times of macroeconomic downturn, reliable, growing cash flows – contribute to risk-adjusted returns and portfolio diversification.
Infrastructure remains at the early stages of development and its needs are massive. In 2017, the Global Infrastructure Outlook from Oxford Economics[1] forecasted that infrastructure investment needs to reach $94 trillion by 2040 to keep up with profound economic and demographic changes across the globe. This makes infrastructure one of the largest opportunities for institutional investors and private fund managers for the next couple of decades.
Understanding the Opportunities
Infrastructure assets range from transportation and energy, to water and communications, and enable economic activity across the globe. They also offer a broad spectrum of risk/reward profiles and strategy options: US, Europe or Asia-Pacific, emerging versus developing markets. Brownfield versus greenfield, and equity versus debt.
Recent data from Preqin suggests that more than 60 percent of institutional investors in infrastructure are still below their target allocations. A whopping 93 percent of surveyed investors said their infrastructure investments have met or exceeded their expectations.[2] But as competition for attractive deals intensifies, the challenge can be to find high-quality opportunities. With investor demand outstripping supply in some cases, investors who are looking for more exposure in the infrastructure space may find that collaborating with larger managers will give them their desired exposure to infrastructure. We’re also seeing larger managers establish open-ended fund products to help investors enter and exit the space as it fits with their growth plans and available capital.
Structuring Infrastructure
Our 2017 Growth Readiness Study highlighted a strong growth trajectory for investments into alternative assets, but also showed that many firms are turning to third-party service providers to help scale operations at the necessary pace and perform functions more efficiently.
One area that’s really heating up is the battle for talent. It’s a piece of the puzzle that newcomers to the space should not overlook. The highly technical infrastructure field mixes engineering and financial expertise. Its complex deals require considerable execution expertise and typically demand a hands-on approach led by a dedicated asset management team that can support the transition into a strong, standalone business. Subject-matter experts who speak the language of infrastructure assets and understand investors’ needs in the market are critical.
Supporting our Clients
In our evolution from real estate to real assets, we remain fully committed to supporting the needs of real estate managers. For clients who are considering adding infrastructure in their real asset portfolio, we offer the support of our industry expertise and dedicated fund administration office. We’re enhancing our real assets platform and reporting to support the diverse nature of infrastructure investments and their specific attributes as well as the variety of closed- and open-end fund structures. By servicing a wide range of fund managers, we’re well positioned for funds just entering this growing space as well as funds with existing portfolios focused on infrastructure.
In addition to delivering a dedicated infrastructure fund services offering, we offer credit services and FX solutions. Given the growing needs for transparency and oversight, and the diversity of sub-asset classes within infrastructure, we’re also looking at how we can incorporate asset-level data analytics solutions for both asset managers and asset owners.
The alternative asset manager sector has seen tremendous growth in recent years. With infrastructure needs climbing globally and investors looking for new routes that will help them meet growth goals, investments in infrastructure look to be a real opportunity.
For additional information, please contact:
- Scott Carpenter 617-664-6156 [email protected]
- Amos J. Rogers III 617-664-7424 [email protected]
- Kyle Alexander 212-258-1824 [email protected]
Footnotes
[1] Global Infrastructure Outlook, Oxford Economics © 2017 Global Infrastructure Hub
[2] 2018 Preqin Global Infrastructure Report
Disclosure
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